Home Office Deductions for Landlords: An Overview

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

The key to this tax deduction is that rental property owners may claim this write-off if they are active, which is to say you must be doing more than cashing checks. If you regularly 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 qualifier you will also have to meet the basic home office deduction thresholds. To begin with, you must use the home office exclusively for your rental business on a regular basis.

Then you’ll also have to meet at least one of the following:

1. This office must be your principle space for the day-to-day running of your rental property business.

2. You must have no other location from where you run the administrative end of your property managment rental business.

3. You connect with tenants there.

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 have to look into what kind of expenses can be written off. There are direct and indirect types of home office deductions. Direct expenses exclusively benefit the home office area of your home, expenses such as painting or cleaning. Indirect expenses benefit the entire home and must be apportioned out between the home office space and the rest of your house. Property tax, insurance, mortgage interest, and utilities are typical examples of indirect expenses. Square footage is the usual way 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 written off 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.

Because you don’t want any trouble if you do get audited, you want to keep good records to establish that you were actually entitled to take the deduction and that the claim has been accurately reported. You should document the home office space with a diagram and/or photograph that supports your calculations. It is smart to use your home office address on your business cards and other forms of collateral and to have business mail delivered to the office address. You should keep a log of client meetings and other time spent working in this space. Records to keep proving expenses include: 1098 mortgage interest statements, property tax statements, utility bills, insurance premium notices and receipts for other relevant home office expenses.

Home office deductions can get complicated. Please do not consider this to be reasonable solution to the informed counsel of seasoned Bellevue CPA. But this should help you gain a basic understanding the requirements of successfully claiming home office deductions.

Bellevue Accountant +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.