Deductions for Landlords: The Home Office

The Internal revenue service claims that home office deductions are no more likely to inspire an audit than any other deductions, Still many taxes payers are leery of this deduction. The solution is: stick to the rules and you should have nothing to fear.

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

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

On top of that, you must meet at least 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. You use the office to meet clients and potential clients.

4. You use another structure on your property to conduct business.

After you’ve determined that you are eligible for home office deduction, then it’s time to look at what expenses qualify for write offs. There are two major types: indirect and direct. Indirect expenses benefit the entire home. Direct expenses benefit only the home office space. 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 home. This percentage is typically calculated by the square-footage ratio. For instance, a 2,000 square foot home with a 200 square foot office space would mean that 10% of indirect expenses (mortgage payments, utilities, et cetera) would count toward home office deduction expenses.

Since you don’t want any trouble if you do get audited, you want to keep careful records to affirm that you were actually 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 beneficial to use your home office address on any business cards and other forms of collateral and to have business mail delivered to the home office address. You should make an effort to meet clients at the home office and maintain a log to keep track of the client meetings and other time spent working there. Records you should keep to prove expenses include: utility bills, property tax statements, insurance premium notices, 1098 mortgage interest statements and receipts for any other home office expenses.

This subject matter can get quite complex 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.

Seattle 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.