Deductions for Landlords: The Home Office

There are few deductions taken by business owners that are more dreaded than home office deductions. Some business owners are convinced that claiming this deduction increases the likelihood of an audit, yet the IRS is adamant that this is just not the truth. Either way, if you follow the rules, and maintain proper records, 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 be doing more than cashing checks. If you regularly spend a substantial amount of time preparing and maintaining properties, you will likely qualify as an ACTIVE rental property owner.

After you’ve met this requirement you will also have to meet the basic home office deduction thresholds. To begin with, 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. This space also serves as meeting location for your clients.

4. You use another 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 need to look into what kind of expenses can be written off. There are direct and indirect types. Direct expenses only benefit the home office area of your home, expenses such as cleaning or painting. Indirect expenses benefit the entire home 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 system 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 house 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 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 communication. And while using your home office to meet customers, it is wise to keep a log to keep track of meetings. You should keep utility bills, mortgage interest statements, insurance premium statements, property tax statements, and other relevant expense statements.

This topic 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 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.