Deductions for Landlords: The Home Office

Many are leery of home office deductions, concerned that these deductions are more likely to inspire an IRS audit. The IRS claims there is no legs to this. No matter the case, follow the rules and you should have no concerns.

To claim this deduction you must be active (beyond depositing monthly checks). If you regularly spend a substantial amount of time maintaining and preparing properties, you’ll likely fit the definition of the term “active”.

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.

Additionally, you must meet one of the following requirements:

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

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 in this home office space.

4. You use a separate structure on your property for conducting 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 will have to look into what kind of expenses are tax deductible. There are direct and indirect types. Direct expenses only benefit the home office area of your home, expenses such as cleaning or painting. Indirect expenses benefit the entire structure and must be apportioned out between the office area and the rest of your house. Mortgage interest, insurance, property taxes and utilities are common examples of indirect expenses. Square footage is the usual way of calculating 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 you sell the house.

And you will want to ensure that you are keeping diligent 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 when using your home office to meet customers, it is wise to keep a record of meetings. You should keep relevant expense statements, such as insurance premium notices, mortgage interest statements, property tax statements, utility bills, and other appropriate expense statements.

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

Auburn Tax 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.