The IRS claims that home office deductions are no more likely to encourage an audit than any other tax deductions, Still many taxes payers are nervous about this deduction. The solution: stick to the rules and 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 just accept and deposit rental checks monthly. You need to 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 only for running your business as a rental property manager.
In addition, you must meet at least one of the following requirements:
1. This office space must be the principle location from where you manage your business as a rental property manager.
2. You must have no other location from where you run the administrative end of your management property rental business
3. You interact with tenants there.
4. You use a separate structure on your property for conducting 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. And direct expenses benefit only the home office space. 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 illustrate, a 2,000 square foot home with a 200 square foot office space would mean that 10% of indirect expenses (mortgage payments, utilities, et cetera) would qualify for home office deduction expenses.
And you will want to ensure that you are keeping fastidious 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 while using your home office to meet customers, it is wise to keep a record of meetings. You should keep relevant expense statements, such as property tax statements, insurance premium notices, mortgage interest statements, utility bills, and other relevant expense statements.
This subject can get quite sophisticated and the above is only intended to give you a basic understanding of the circumstances that would allow you to take advantage of the home office deduction.
Seattle 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.