The federal government helps out business owners by letting them deduct their home office expenses from their taxable income. This is true whether you own your home or apartment or are a renter.
Qualifying for the Home Office Deduction
In the past, the IRS took the position that landlords couldn’t take the home office deduction. However, the tax court has held that landlords who meet the requirements may take the deduction, and landlords have successfully done so. Moreover, changes in the tax law that took effect in 1999 make it easier than it has ever been for landlords (and other business owners) to take the home office deduction, and harder for the IRS to successfully object. Still, the IRS doesn’t go out of its way to encourage landlords to take the deduction. Indeed, you won’t find a single word about it in any IRS publication or form.
There are strict requirements you must meet to qualify for the home office deduction. You are entitled to the home office deduction if:
- your rental activities qualify as a business
- you use your home office exclusively for your rental business, and
- you use your home office for rental business on a regular basis.
After you meet these three threshold requirements, you must also satisfy any one of the following four requirements:
- you regularly and exclusively use your home office for administrative or management activities for your rental business and have no other fixed location where you regularly perform such activities
- you perform your most important rental activities at your home office
- you meet business-related visitors, such as tenants, at your home office, or
- you use a separate structure on your property exclusively for rental business purposes.
Your Rental Activities Must Be a Business
Your rental activities must qualify as a business for tax purposes if you want to take the home office deduction. The deduction is not available if your rental activity qualifies only as an investment. Whether your rental activity is a business depends on how much time and effort you put into it. To be a business, you must be actively involved in managing your property on a regular, systematic, and continuous basis. You don’t have to work full-time as a landlord—in fact, you can have only a single rental unit and still be a business for tax purposes. You just must be able to show that you are actively involved in managing the rental.
You Must Use Your Home Office Exclusively for Business
You can’t take the home office deduction unless you use part of your home exclusively for your rental business. In other words, you must use your home office only for your rental business. The more space you devote exclusively to your business, the more your home office deduction will be worth.
If you use part of your home—such as a bedroom—as your rental business office, and you use that same space for personal purposes, you won’t qualify for the home office deduction.
You Must Use Your Home Office Regularly
It’s not enough to use a part of your home exclusively for business; you must also use it regularly. For example, you can’t place a desk in a corner of a room and claim the home office deduction if you almost never use the desk for your business.
Unfortunately, the IRS doesn’t offer a clear definition of regular use. The agency has stated only that you must use a portion of your home for business on a continuing basis—not just for occasional or incidental business. One court has held that 12 hours of use a week is sufficient. (Green v. Comm’r., 79 T.C. 428 (1982).)
Many landlords probably spend less than 12 hours per week working in their home offices. As long as they work regularly, they probably pass muster with the IRS.
How Much Is the Home Office Deduction Worth?
If you own the home where your home office is located (as most landlords do), the home office deduction isn’t as valuable as it is for those who are renters. This is because your mortgage interest is deductible whether or not you have a home office, while rent is not deductible without a home office. Still, homeowners who qualify for the deduction will be able to recoup some of their business-related costs by understanding and using this deduction.The IRS divides home office expenses into two categories: direct expenses, which benefit only your home office, and indirect expenses, which benefit both your office and the rest of your home.
You have a direct home office expense when you pay for something just for the home office portion of your home. This includes, for example, the cost of painting your home office, carpeting it, or hiring someone to clean it. The entire amount of a direct home office expense is deductible.
An indirect expense is a payment for something that benefits your entire home, including both the home office portion and your personal space. You may deduct only a portion of this expense—the home office percentage of the total.
Most of your home office expenses will be indirect expenses, including:
- home maintenance
- casualty losses
- security systems, and
- condominium association fees.
Profit Limit on Home Office Tax Deductions
The tax code significantly limits the size of any home office deduction: You cannot deduct more than the net profit you earn from a business you run from your home office. If your rental business earns a substantial profit, this won’t pose a problem. But if your business earns very little or loses money, the limitation could prevent you from deducting part or even all of your home office expenses in the current year.For more details on the home office deduction see The Home Office Tax Deduction.