Deductions for Landlords: The Home Office

The IRS claims that home office deductions are no more likely to inspire an audit than any other tax deductions, Still many business owners are leery of this deduction. The solution: stick to the rules and 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 just accept and deposit rent checks on a monthly basis. You must consistently spend a substantial amount of time maintaining properties and preparing them for rent as well as seeking new tenants.

If you have met this requirement you’ll also need to meet the basic home office deduction thresholds. Firstly, you have 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 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 meet up with clients in this home office space.

4. You use some other structure on your property to conduct business.

After you’ve determined that you are eligible for home office deduction, then it’s time to learn what expenses qualify for deductions. There are two major types: indirect and direct. Indirect expenses benefit the entire home. And direct expenses benefit the home office space only. Examples of direct expenses can be painting or cleaning expenses. While examples of indirect expenses can be payments on property tax, mortgage,, and utilities, these expenses are apportioned out between the office and the rest of your residence. This percentage is ordinarily calculated by the square-footage ratio. To illustrate, a 2,000 square foot home with a 200 square foot office space would mean that 10% of indirect expenses would count toward home office deduction expenses.

As you don’t want any trouble if you do get audited, you are going to want to keep good records to verify that you were entitled to take the deduction and that it has been accurately reported. You should document the home office space by a diagram and/or photograph that supports your calculations. It is a good idea to use your home office address on your 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 in this space. Records you should keep to prove expenses include: insurance premium notices, 1098 mortgage interest statements, utility bills, property tax statements and receipts for 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 Tax Accountant.

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.

 

Seattle CPAsAbout Seattle CPAs
CPA for Dentists+John Huddleston has written extensively on tax related subjects of interest to small business owners. Since 2002, he has been the owner of Huddleston Tax CPAs. He is a graduate of Washington State University and the University of Washington School of Law.

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