Home Office Deductions for Landlords: An Overview

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

To claim this deduction you must be active (beyond depositing monthly checks). If you routinely 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.

Additionally, you must meet one of the following requirements:

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

2. There is no other fixed location where you perform administrative and management activities.

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

4. You use another structure on your property to conduct business.

After you have applied the threshold tests above and determined that the work area in your home does in fact qualify for the home office deduction, you have to look into what kind of expenses can be written off. There are direct and indirect types. Direct expenses only benefit the home office area of the home such as painting or cleaning. Indirect expenses benefit the entire home and must be apportioned out between the home office space and the rest of your house. Mortgage interest, insurance, property taxes and utilities are examples of indirect expenses. Square footage is the usual means 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 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 when you sell the house.

As you don’t want any trouble if you do get audited, you want to keep careful 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 calculations. It is wise to use your home office address on company business cards and other forms of communication and to have business mail delivered to the home office address. You should maintain a log of client meetings and other time spent working there. Records to keep proving expenses include: property tax statements, utility bills, insurance premium notices, 1098 mortgage interest statements and receipts for other relevant home office expenses.

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

Renton 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.