The Home Office Deduction for Landlords

A large number of business owners are leary of home office deductions, concerned that these tax deductions are more likely to encourage an IRS audit. The IRS claims there is no legs to this claim. Whatever the case, follow the rules and you should have no concerns.

Active owners of a rental property may qualify for the home office deduction. The key to this deduction is the word active. The landlord must do more than simply receive and deposit rent payments monthly. You must regularly spend substantial time maintaining properties and preparing them for rent as well as seeking new tenants.

If you have met this requirement you will also have to meet the basic home office deduction thresholds. To start with, you must use the home office exclusively for your rental business on a regular basis.

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

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 business

3. You connect with tenants in this office space.

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 learn what expenses qualify for deductions. There are two major types: direct and indirect. Indirect expenses benefit the entire home. While direct expenses benefit the home office space only. Examples of direct expenses can be cleaning or painting 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. By way of example, a 2,000 square foot home with a 200 square foot office space would mean that 10% of indirect expenses would qualify for home office deduction expenses.

And you will want to ensure that you are keeping fastidious 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 clientele, it is wise to keep a record of meetings. You should keep utility bills, mortgage interest statements, insurance premium statements, property tax statements, and other pertinent 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.