Deductions for Landlords: The Home Office

There are few tax deductions for business owners that are more feared than home office deductions. Some business owners are convinced that claiming this deduction increases the odds of an audit, although the IRS is insistent that this just isn’t the case. Either way, if you follow the rules, and maintain proper documentation, you should have no worries.

The key to this deduction is that rental property owners may claim this write-off if they are active, which is to say you must be doing more than cashing checks. If you routinely 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 only 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 have no other fixed location where you perform administrative and management activities.

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

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 look at what expenses qualify for write offs. There are two major types: indirect and direct. Indirect expenses benefit the entire home. While direct expenses benefit the home office space only. Examples of direct expenses could be cleaning or painting expenses. While examples of indirect expenses can be payments on mortgage, property tax, and utilities, these expenses are apportioned out between the office and the rest of your home. This percentage is normally calculated by the square-footage ratio. To demonstrate, a 2,000 square foot home with a 200 square foot office space would mean that 10% of indirect expenses would count toward home office deduction expenses.

And you will want to ensure that you are keeping meticulous 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 clients, 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 appropriate expense statements.

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

Seatac 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.