Home Office Deductions for Landlords: An Overview

There are few deductions for business owners that are more feared than the dreaded home office deduction. Some tax payers are convinced that claiming this deduction increases the possibility of an audit, while 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 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 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 exclusively for running your business as a rental property manager.

In addition to that, you must meet at least one of the following conditions:

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

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

3. You utilize this space to meet clients and potential clients.

4. You use a separate structure on your property for business.

After you have applied the threshold tests above and determined that the work area in your home does in fact meet the requirements 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 the home such as cleaning or painting. Indirect expenses benefit the entire home and must be apportioned out between the office space and the rest of the house. Property tax, insurance, mortgage interest, and utilities are examples of indirect expenses. Square footage is the common way of determining 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 you sell the house.

Because you don’t want any trouble if you do get audited, you want to maintain good records to demonstrate that you were/are entitled to take the deduction and that the claim has been accurately reported. You should document the home office space by a diagram and/or photograph that supports your square footage calculation. It is advisable to use your home office address on your business cards and other forms of communication and to have business mail delivered there. You should maintain a log of client meetings and other time spent working there. Records you should keep to substantiate expenses include: property tax statements, utility bills, insurance premium notices, 1098 mortgage interest statements and receipts for other relevant home office expenses.

This process can get quite complex and the aforementioned is only intended to give you a basic understanding of the circumstances that would allow you to take advantage of the home office deduction.

Bothell Tax 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.