The Home Office Deduction for Landlords

The Internal revenue service claims that home office deductions are no more likely to encourage an audit than any other tax 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 consistently spend a substantial amount of time maintaining and preparing properties, you’ll likely fit the term “active”.

So if you qualify as an active rental property owner, the next requirement is that the home office space is used exclusively for managing your rental business.

In addition, you must meet at least one of the following requirements:

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

2. You have no other fixed location where you perform administrative and management activities.

3. This office space also serves as meeting location for 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 qualify for the home office deduction, you’ll have to look into what kind of expenses are tax deductible. There are direct and indirect types. Direct expenses solely benefit the home office area of your home, expenses such as cleaning or painting. Indirect expenses benefit the entire structure and must be apportioned out between the home office space and the rest of the house. Property tax, insurance, mortgage interest, and utilities are examples of indirect expenses. Square footage is the standard way 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 if the house is sold.

And you will want to ensure that you are keeping diligent records in case there is an 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 professional communication. And when using your home office to meet clients, it is wise to keep a log to keep track of meetings. You should keep relevant expense statements, such as property tax statements, insurance premium notices, mortgage interest statements, utility bills, and other pertinent expense statements.

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

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.

 

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

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