Are you a rental property owner wondering how the home-office deduction might apply to you?
Owning rental property can be lucrative, but you need to understand all the laws, especially tax-related laws, which might impact your revenue.
Jeffrey Zhou, CEO and Founder of Fig Loans, advises, “Never leave money on the table. Understanding tax laws is one of the smartest investments a property owner can make. It can mean the difference between maximizing profits and missing out on valuable savings.”
Tax regulations are typically complex, but knowing the law and the potential benefits you can legally claim may open doors for revenue growth and cost savings.
Tax laws are best discussed with a tax attorney or CPA. However, this article will give you an idea of the possibilities available with home-office deductions.
Let us get started!
What is the Home-Office Deduction?
“The home office deduction is a tax benefit available to self-employed individuals and business owners who use a particular part of their home solely for business,” shares David Haskins, CEO at WrongfulDeathLawyer.com.
“If you qualify,” he adds, “you may take advantage of allowances for expenses such as mortgage interest, insurance costs, utilities, repairs, maintenance, depreciation, and rent for the portion of your home that serves as an office for your business.”
Do Rental Property Owners Qualify for the Home-Office Deduction?
The landmark Curphey vs. Commissioner case answers this question. In this case, the court held that the petitioner, a dermatologist who managed six rental properties, was entitled to deduct expenses for the portion of his home used exclusively and regularly as his principal place of business for rental activities.
This principle is notable because it established that managing rental properties can be considered a trade or business for tax purposes, even if it is not the taxpayer’s primary occupation.
However, the first thing to note is that the home-office deduction applies only to people running an active business or trade. While many businesses, including rental property businesses, qualify under this provision, passive investors are excluded.
To claim the deduction, there are three key requirements:
- Exclusive Use: The designated space must be used solely for business.
- Regular Use: Business activities must be conducted consistently and continuously.
- Principal Place of Business: Your home office should be the primary location for managing your rental properties.
Conrad Wang, Managing Director at EnableU, weighs in with some advice for rental property owners. He says, “The key to proving that your home-office meets the requirements laid out by law is demonstrating that you have or play an active role in managing your rental property.”
Even if you have agents working for you, their activities may also count in determining whether your involvement in the business would qualify you to claim the home office deduction.
Who Will Not Qualify for the Home-Office Deduction?
If you are still unclear about whether your business might qualify for the home-office deduction, here is a list of people who will not qualify:
1. Passive investors
Passive investors invest in a business but do not actively participate in its operations. Since they are not considered self-employed or business owners, they do not qualify for the home office deduction.
2. Employees
Employees who work from home are not eligible for the home office deduction if they are employees rather than self-employed or business owners.
3. People who use their home office for other businesses
If you use your home office for multiple businesses, you cannot claim a deduction for any of the businesses. This is because the space must be used exclusively for one business or for other rental properties that individually meet all the requirements to qualify for a home-office deduction.
For example, a person who owns four rental properties may dedicate a room in her home exclusively to managing them. She may use this room to meet with tenants, process repairs, and manage the finances of her properties. Thus, she likely qualifies for deducting a portion of her home expenses from her rental expenditures.
On the other hand, a person who owns a rental property but hires a property management company to oversee all aspects of the business and only occasionally reviews reports in his home office is a passive investor and will likely not qualify for home-office deductions.
Using a property management firm might not aid your chances of qualifying for a home-office dedication, but there are times when you might need one. We answer this question in our article on determining whether you need a property management firm.
Claiming the Home-Office Deduction
Expenses related to the portion of your home used exclusively and regularly for your rental property business are included in your overall rental expenses. These expenses might consist of a prorated portion of:
- Mortgage interest
- Property taxes
- Insurance
- Utilities
- Repairs and maintenance
- Depreciation
One thing you can do to improve your chances of qualifying for a home-office deduction as an active owner of rental properties is to acquire some real estate credentials.
Grant Aldrich, Founder of Preppy, explains, “Achieving real estate professional status isn’t just a badge; it’s a game-changer for tax efficiency. This is because the IRS will more readily recognize your rental activity as an active business.”
Final Word
The home-office deduction offers an excellent opportunity for rental property owners who actively manage their businesses.
Gary Hemming, Owner & Finance Director at ABC Finance, shares this insight: “Every bit of gain in managing your taxes counts toward your revenue and bottom line. If you are a rental owner, claiming tax deductions on your legitimate home-office tax home is smart, and you should investigate it. Otherwise, you’re practically giving money away.”
With your taxes and tax deductions properly accounted for, you can create realistic rental property budgets and plan accordingly.
Be sure to keep meticulous record-keeping to support your case in the event of a dispute with tax authorities. These records are also pivotal in the event of a legal dispute.
As Lev Peker, CEO at CARiD, shares, “Tax planning is a year-round endeavor. Understanding deductions like the home-office rule can significantly reduce your tax liability. Keep detailed records of all income and expenses related to your rental properties, including documentation of your active involvement in managing them.”
You will also need to keep these records even after you have filed your tax returns. In the US, the IRS actually asks that tax records and supporting documentation be kept for at least three years after you file your tax returns.
As we have shown in this article, you will have detailed, specific rules to comply with to claim a home-office deduction successfully. We strongly recommend you consult a lawyer or CPA for tax advice specific to your circumstances.
For more information on growing your revenue with real estate, we recommend reading this helpful guide to investing in real estate.
