The Home Office Deduction for Landlords

Many tax payers are leery of home office deductions, concerned that these deductions are more likely to spur an IRS audit. The IRS claims there is no legs to this. Regardless, follow the rules and you should have no concerns.

To claim this deduction you must be active (beyond depositing monthly checks). If you regularly spend a substantial amount of time maintaining and preparing properties, you will likely fit 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 only for running your business as a rental property manager.

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

1. This office must be your principle space for the day-to-day running of your rental property business.

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

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

4. You use a separate structure on your property for conducting 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 need to look into what kind of expenses can be written off. There are direct and indirect types. Direct expenses exclusively 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 office area and the rest of your house. Mortgage interest, insurance, property taxes and utilities are common examples of indirect expenses. Square footage is the standard technique 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 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 if you sell the house.

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 professional communication. And when using your home office to meet renters, it is wise to keep a record of meetings. You should keep property tax statements, insurance premium notices, mortgage interest statements, utility bills, and other related 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.