The Home Office Deduction for Landlords

The IRS claims that home office deductions are no more likely to spur an audit than any other deductions, Still many taxes payers are leery of this deduction. The solution: stick to the rules and you should have nothing to fear.

The key to this deduction is that rental property owners may claim this deduction if they are active, which is to say you must be doing more than cashing checks. If you consistently spend a substantial amount of time preparing and maintaining properties, you will likely qualify as an ACTIVE rental property owner.

After you’ve met this requirement you will also have to meet the basic home office deduction thresholds. For starters, you have to use the home office exclusively for your rental business on a regular basis.

On top of these requirements, you must meet at least one of the following expectations:

1. This office space must be the principle location from where you manage your business as a rental property manager.

2. You have no other fixed location where you perform the administrative activities that are required to operate your business.

3. You interact with tenants in this home office space.

4. You use a separate structure on your property for business.

After you have applied the threshold tests above and determined that the work area in your home does in fact meet the requirements for the home office deduction, you will have to look into what kind of expenses can be written off. There are direct and indirect types. Direct expenses solely benefit the home office area of your home such as cleaning or painting. Indirect expenses benefit the entire home and must be apportioned out between the office space and the rest of your house. Mortgage interest, insurance, property taxes and utilities are examples of indirect expenses. Square footage is the basic means of determining the proportion of the home office in relation to the entire house to come up with a percentage. A 2,000 square foot house with a 200 square foot home office area would mean 10% of the indirect expenses could be deducted as part of the home office deduction. You can also depreciate the house structure (not the value of the land) in the same percentage over 40 years. However, this may complicate matters if the house is sold.

And you will want to ensure that you are keeping diligent records in case there is an irs audit. You will need to be able to prove that you were entitled to any claimed tax deductions. A diagram and/or a photo will support your claim of square-footage ratios. It is wise to have your home office address listed on business cards, letter heads, or other forms of professional communication. And when using your home office to meet customers, it is wise to keep a log to keep track of meetings. You should keep utility bills, mortgage interest statements, insurance premium statements, property tax statements, and other appropriate expense statements.

This is a basic guide to home office deductions. This is not a substitute for the expert counsel of a Seattle Accountant.

Seattle CPA +John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.