How a Small Apartment Can Qualify for Home Office Deduction

How you arrange and use space is key to qualifying for the home office deduction, particularly in a small living space.

By , J.D. · USC Gould School of Law

If you're in business for yourself, the home office deduction can be one of your largest tax deductions. This is particularly likely to be true if you're a renter because it allows you to deduct a portion of the rent you pay for your apartment or home, an expense that is ordinarily not deductible at all.

For renters who live in high-cost areas like New York City or San Francisco, the home office deduction can be substantial. In one case, a public relations professional who worked out of a home office in her Manhattan studio apartment was entitled to an annual home office deduction of $9,293.

Restrictions on Taking the Home Office Deduction for Apartment Dwellers

Some restrictions on taking the home office deductions can make it difficult for people who live and work in small apartments to qualify for it, particularly the exclusive use test.

No Deduction Unless You Use Part of Your Apartment Exclusively for Your Business

You can't take the home office deduction unless you use part of your apartment or home exclusively for your business. In other words, you must use your home office only for your business. However, this requirement doesn't apply if you store inventory at home or run a home daycare center.

If you use part of your home, such as a room or studio, as your business office, but you also regularly use that same space for personal purposes, you won't qualify for the home office deduction.

The Easiest Way to Meet the Exclusive Use Test: Devote an Entire Room to Your Business

The easiest way to meet the exclusive use test is to devote an entire room in your home to your business. For example, you could use a spare bedroom as your office.

What If I Can't Devote an Entire Room to My Business?

Not everybody has an extra room to spare, and the IRS recognizes this fact. You can still claim the deduction even if you use just part of a room as your office, as long as you use that part exclusively for business.

However, as a practical matter, people who live in very small apartments can have a hard time convincing the IRS or tax court that they use part of their space only for business.

Example Where the IRS Didn't Allow the Home Office Deduction

One taxpayer, a psychologist who lived in San Francisco, claimed a home office deduction for one-quarter of her apartment. The entire apartment was a 400-square-foot studio consisting of an open area (approximately 13 feet by 15 feet) furnished with a desk and a couch and a small dining area and kitchen (each approximately 7 feet by 8 feet). The area of the apartment this taxpayer said she used exclusively for business purposes was also the main passageway through the apartment.

Given the layout of this tiny apartment, neither the IRS nor the tax court believed her claim that she used 100 square feet exclusively for her psychology business and she wasn't allowed to take the deduction. (Mullin v. Comm'r, TC Memo 2001-121).

Example Where the IRS Did Allow the Home Office Deduction

On the other hand, another taxpayer, with a 700-square-foot studio apartment in Manhattan, did qualify for the home office deduction. She was a public relations professional and divided her apartment into three equal sections: (1) an entryway, a bathroom, and a kitchen area; (2) an office space, including a desk, two shelving units, a bookcase, and a sofa; and (3) a bedroom area including a platform bed and dressers.

She admitted that she had to pass through the office space to get to the bedroom area. Nevertheless, the tax court found that the office area of her apartment satisfied the exclusivity requirement for the home office deduction. It held that "her personal use of the space was de minimis and wholly attributable to the practicalities of living in a studio apartment of such modest dimensions." (Miller v. Comm'r, T.C. Summary Opinion 2014-74).

How to Pass the Exclusive Use Test If You Live in an Apartment

If you use the same room (or rooms) for your office and for other purposes, you should arrange your furniture and belongings so that a portion of the room is devoted exclusively to your business. Place only your business furniture and other business items in the office portion of the room.

Business furniture includes anything that you use for your business, such as standard office furniture like a desk and chair. Depending on your business, it could include other items as well—for example, a psychologist might need a couch, an artist might need work tables and easels, and a consultant might need a seating area to meet with clients.

One court held that a financial planner was entitled to have a television in his home office because he used it to keep up on financial news. Be careful what you put in this space, however. In another case, the IRS disallowed the deduction for a doctor because he had a television in the part of his living room that he claimed as his home office. The court wouldn't buy the doctor's claim that he only watched medical programs.

As the public relations professional's case shows, so long as you regularly use a dedicated space for your home office, the fact that you may have to pass through that space to get to other portions of your apartment will not disqualify you for the home office deduction.

Get More Information

For more information on this and other tax issues for small businesses, get Deduct It! Lower Your Small Business Taxes, by Stephen Fishman (Nolo).

If you need more help, talk to a tax professional, such as a certified public accountant or a tax attorney. A tax professional can prepare tax returns or provide tax information, guidance, or representation before the IRS.

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