The Home Office Deduction for Landlords

There are few tax deductions taken by business owners that are more feared than home office deductions. Some business owners are convinced that claiming this tax deduction increases the chance of an audit, yet the IRS is adamant that this is just not the case. Either way, if you follow the rules, and maintain proper records, you should have nothing to fear.

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 merely receive and deposit rental checks every month. You will need to consistently spend substantial time maintaining properties and preparing them for rent as well as seeking new tenants.

If you’ve met this qualifier you’ll also need to meet the basic home office deduction thresholds. First of all, you need to 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 running your business.

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

3. You use the space to meet clients and potential clients.

4. You use some other structure on your property to conduct 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’ll have to look into what kind of expenses can be written off. There are direct and indirect types. Direct expenses exclusively benefit the home office area of the home such as painting or cleaning. Indirect expenses benefit the entire home and must be apportioned out between the office space and the rest of the house. Property tax, insurance, mortgage interest, and utilities are common examples of indirect expenses. Square footage is the standard method 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 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 when you sell the house.

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

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

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.

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Kirkland CPAAbout Kirkland CPA
Kirkland 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.

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  • Huddleston Tax Accountants / Huddleston Tax CPAs – Kirkland
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