Home Office Deductions for Landlords: An Overview

A large number of business owners 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. In any case, follow the rules and you should have no concerns.

The key to this deduction is that owners of rental properties may claim this write-off if they are active, which is to say you must do more than cashing checks. If you consistently spend a substantial amount of time preparing and maintaining properties, you will likely qualify as an ACTIVE rental property owner.

If you meet the criteria for being an active rental property management the next requirement is that you must regularly use the office space exclusively for running your business as a rental property manager.

Additionally, you must meet one of the following requirements:

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

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

3. This space also serves as meeting location for clients.

4. You use some other 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 meet the requirements for the home office deduction, you will have to look into what kind of expenses can be written off. There are direct and indirect types of home office deductions. Direct expenses solely benefit the home office area of your home 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 common examples of indirect expenses. Square footage is the basic way 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 when you sell the house.

And you will want to ensure that you are keeping meticulous 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 communication. And when using your home office to meet renters, it is wise to keep a log to keep track of meetings. You should keep insurance premium notices, mortgage interest statements, property tax statements, utility bills, and other appropriate expense statements.

This topic can get quite complicated 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.

Federal Way 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.