Deductions for Landlords: The Home Office

There are few tax deductions for business owners that are more feared than the dreaded home office deduction. Some business owners are convinced that claiming this deduction increases the chances of an audit, yet the IRS is insistent that this is just not the case. Either way, if you follow the rules, and records are properly documented, you should have nothing to fear.

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 accept and deposit checks monthly. You should consistently spend substantial time maintaining properties and preparing them for rent as well as seeking new tenants.

If you meet the criteria for being an active rental property management the next requirement is that you must regularly use the office space solely for running your business as a rental property manager.

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

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

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

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

4. You use a separate structure on your property for 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: indirect and direct. Indirect expenses benefit the entire home. While direct expenses benefit the home office space only. Examples of direct expenses can be painting or cleaning 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 usually calculated by the square-footage ratio. For 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.

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

This is a basic guide to home office deductions. This is not a substitute for the expert counsel of a Bellevue Certified Public Accountant.

Bellevue 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.