Deductions for Landlords: The Home Office

There are few tax deductions for business owners that are more feared than the dreaded home office deduction. Some tax payers are convinced that claiming this deduction increases the likelihood of an audit, while the IRS is insistent that this is just not the case. Either way, if you abide by the rules, and maintain proper documentation, you should have no worries.

The key to this tax deduction is that owners of rental properties may claim this tax 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.

On top of that, you must meet at least one of the following criteria:

1. This home office must be your principle space for running your rental property business.

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

3. You utilize the office to meet clients and potential clients.

4. You use a separate structure on your property for conducting 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 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 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 standard means 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 the house is sold.

And you will want to ensure that you are keeping fastidious records in case there is an irs audit. You will need to be able to prove that you were entitled to any 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 while 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.

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

Seattle 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.

Be sure to check out our Tax Experts page at Small Business Webcast, they are CPAs and accountants well versed in tax prep, bookkeeping, payroll services and business valuations too.