Home Office Deductions for Landlords

Many are leery of home office deductions, concerned that these deductions are more likely to spur an IRS audit. The IRS claims there is no meat to this. Regardless, follow the rules and you should have no concerns.
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’ve met this requirement you will also have to meet the basic home office deduction thresholds. Firstly, you need to use the home office exclusively for your rental business on a regular basis.
Additionally, you must meet one of the following requirements:
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 property managment rental business.
3. This space also serves as meeting location for your clients.
4. You use a separate structure on your property for conducting business.
After you have applied these threshold tests and determined that the work area in your home does in fact qualify for the home office deduction, you will 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 your home, expenses such as cleaning or painting. Indirect expenses benefit the entire home and must be apportioned out between the office space and the rest of your house. Property tax, insurance, mortgage interest, and utilities are typical examples of indirect expenses. Square footage is the common technique of figuring out the proportion of the home office in relation to the entire house to come up with a percentage. A 2,000 square foot house with a 200 square foot home office area would mean 10% of the indirect expenses could be written off 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 the house is sold.
And you will want to ensure that you are keeping diligent records in case there is an irs 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 when using your home office to meet renters, it is wise to keep a record of meetings. You should keep insurance premium notices, mortgage interest statements, property tax statements, utility bills, 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 Redmond Accountant. But this should help you gain a basic understanding the requirements of successfully claiming home office deductions.
Bellevue 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.