TO TAKE OR NOT TO TAKE, THE HOME OFFICE DEDUCTION

Many landlords conduct their rental operations out of their homes.  The operation may be separate from their regular employment or business, such as a retail store or professional office, or it may be their sole source of livelihood.  Where a business is operated out of the home, there are expenses that the landlord can legitimately take on his Schedule C (self-employment income).  Some who are entitled fail to take them, many who do should not, at least until they modify their business practices.  This article is designed to point the landlord who does his work from home in the right direction.  We deal here with Federal law and regulations only, not the laws of individual states, which may vary.

Simply putting a desk in the house will not qualify the landlord for the home office deduction.  In order to qualify, the home office must be the principal place of business, or the place where the landlord actually meets people, such as prospective tenants, vendors, etc., or a detached structure on the same property as the home which is used exclusively for the business.  So, if the landlord is a real estate broker who has an office downtown at which he sees tenants and vendors and does all his paperwork, then the fact that he browses Landlord.com and makes a few business calls from home will not permit him to take the deduction.

Where there are several work locations, the IRS determines “principal place of business” by comparing the amount of time spent at each.  The “principal place of business” is the place where most time is spent.  In the alternative, if the landlord spends most of his work time doing maintenance and visiting his tenants, for example, the IRS might permit the deduction on the theory that the most important activities are done in the home office.  Furthermore, after 1998, the home office deduction can be taken if the home is the place where the management and administrative activities of the business occur.

In any event, the landlord may only take a deduction for that portion of the home that is used exclusively for business and for no other purpose.  If there is a desk in the den where some work is done, and where the kids do their homework and play “Doom” on the computer, no deduction can be taken.  The exclusive area need not be partitioned, however.  We have included a copy of the IRS’s current publication on this and similar issues below.  It should be read carefully.

If qualified for the deduction, the landlord may deduct a portion of the real estate taxes, mortgage interest, casualty losses, rent, utilities, insurance, depreciation, painting, and repairs.  The landlord may not take deductions for things such as lawn care and painting of rooms not used for business.

The amount that may be taken is a proportion of the allowable expenses equal to the proportion of the square footage of the house taken up exclusively for business.  Where all the rooms of the house are of nearly equal size, a simplified formula may be used.  For example, in a five-room house in which one room is used for business, one-fifth of allowable expenses may be deducted.  Finally, where the total deductible expenses of the home business exceed the gross income of the business, some otherwise allowable home office expenses may not be taken, although they may be carried forward.

For those who believe they may qualify for the home office deduction, we have included the IRS publication on the subject.  You will need the Adobe Acrobat Reader to view or print this and the tax form we have included.  The landlord may click on the Adobe icon below to download the reader if needed.  All landlords are encouraged to confer with a CPA or tax preparer in case of doubt.  If entitled to the deduction, Form 8829 is available here.

Even if the landlord does not believe the deduction applies to him, brief study of the above publications can well repay the effort, because a couple of simple changes in the way he does business might open the way to making the deduction available to him.  For example, if the only thing standing in the way is the fact that the computer and desk is shared with the kids, getting them their own computer with a separate Internet connection might open the way for enough deductible expenses to repay the investment several times over in the first year.  If this looks possible, a brief talk with a tax advisor is in order.