Home Office Deductions for Landlords

A large number of business owners are leery of home office deductions, concerned that these tax write-offs are more likely to encourage an IRS audit. The IRS claims there is no meat to this. In any case, follow the rules and you should have no concerns.

Active owners of a rental property may qualify for the home office deduction. The key to this deduction is the word “active”. The landlord must do more than simply receive and deposit rent checks every month. You will need to regularly spend substantial time maintaining properties and preparing them for rent as well as seeking new tenants.

So if you qualify as an active rental property owner, the next requirement is that the home office space is used exclusively to manage your rental business.

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

1. Your home office is used as your principle place of business.

2. You have no other fixed location where you perform administrative and management activities.

3. You interact with tenants in this office space.

4. You use another structure on your property to conduct business.

After you have applied these threshold tests and determined that the work area in your home does in fact qualify for the home office deduction, you have to look into what kind of expenses are tax deductible. There are direct and indirect types of home office deductions. Direct expenses exclusively benefit the home office area of the home, expenses such as painting or cleaning. Indirect expenses benefit the entire home and must be apportioned out between the office area and the rest of the house. Mortgage interest, insurance, property taxes and utilities are typical examples of indirect expenses. Square footage is the common system of figuring out the proportion of the home office in relation to the entire house to come up with a percentage. A 2,000 square foot home 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 you sell the house.

And you will want to ensure that you are keeping fastidious records in case there is an 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 while using your home office to meet clients, it is wise to keep a log to keep track of meetings. You should keep relevant expense statements, such as utility bills, mortgage interest statements, insurance premium statements, property tax statements, and other appropriate expense statements.

This subject can get quite complex and the above is only intended to give you a basic understanding of the circumstances that would allow you to take advantage of the home office deduction.

Seattle Accountant 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.

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