Home Office Deduction??

5 Replies

I'm using a CPA for the first time since 2017 was my first year having a rental property. He's my parents' CPA and they have one rental. He told me I can't take any home office deduction (I'm interested in the "simplified one" $5/sf) because I'm not a Real Estate Professional (750 hours spent or half my regular business time). In Amanda and Matt's book, Tax Strategies for the Savvy Real Estate Investor, they say if your home office is "your primary place of business" for real estate activities, then you can deduct it. This is definitely true for me, however, I can't find if Amanda and Matt mention the Real Estate Professional definition as a requirement for that or not.

If I can take the deduction, can you send me some collateral I can forward to my CPA? 

(And I already know I need to find a different CPA because I came with more ideas than he did. This is a DIFFERENT discussion.)

@Lauren Keen I am not sure one way or the other if you can take the deduction since I don't have all the facts, but I can tell you that the real estate professional designation is not a requirement to take the home office deduction with respect to a rental activity.

There is nothing in §280A (the home office section in the tax code) that mentions being a real estate professional is required in order to take the home office deduction for your rental activity.

However, in addition to the rules regarding the space itself, there is the requirement that the taxpayer's rental activities rise to the level of a trade or business, which the Treasury has conveniently never defined for us.

But it seems that rental activities would rise to the level of a trade or business if the activities are substantial, regular, and continuous.

However, there is a case, Curphey v. Commissioner, where the Tax Court held that a dermatologist (who would likely not have qualified as a real estate professional by our current definition of real estate professional) was in fact engaged in a trade or business of managing his six rental units.  Note that this case was enacted before the passive activity rules were enacted in the 1986 tax reform bill and likewise before the 1993 creation of the real estate professional designation.

But at the end of the day, if you're looking for primary authority in the code or regs saying, "You don't need to be a real estate professional to claim the home office deduction for rental activities," you're not going to find it.

Your best bet would be to challenge the CPA as to why he believes the real estate professional designation is necessary.  Ask him for the citation to support his position, and if he can't find it, then ask him why he believes what he believes.  If he's coming up with a rule that's not in the tax code, I would say the burden's on him to prove himself right!

@Lauren Keen

Tax Strategies for the Savvy Real Estate Investor is good book and does make the investor think about deductions he/she is entitled to.

You are entitled to a home office deduction if you had an area in your home that you used for your business(file cabinet to save tenant files, office desk to take and place calls) that was regularly and exclusively used for your business.

There is one caveat with the home office deduction. 

Home office deduction is only currently deductible if you are showing a net profit. Normally real estate businesses show a taxable loss thanks to depreciation. Net Loss = home office deduction not currently deductible. 

The only thing I think your accountant can be thinking is that the home office needs to be used regularly and maybe your accountant's definition of regularly is 14 hours a week(750 hours). I think he is incorrect but maybe you should ask him where he is getting his answer. However, the purpose of having an accountant is to help him not where you are questioning him.

Get it straight from the lion's mouth.

IRS Publication

How to distinguish between hobby and business

All I can find is that your home office must meet two requirements:

  1. Regular and exclusive use.
  2. Principal place of your business.

If you manage your business primarily from home and use that space exclusively for that business, then it sounds like it matches. I've heard about the 750 hour rule but I've never seen anyone link to the IRS publication specifically requiring that for an investor. If anyone has that, I would love to see it.

Thank you all for your detailed responses. What I'm hearing is that the Real Estate Professional designation is not directly related to what deductions a real estate investor could or could not take.

It seems I do meet the requirements. Even taking depreciation into account, my rental made a profit AND I'm actively looking for another one. I analyze deals, read books, learn from the forums, network, visit properties on a weekly if not daily basis.

I will do as suggested and ask him to show me where the real estate professional designation is necessary. 

Update as an FYI: He said the information is not on the IRS website and is IRC 469, so he will not take the deduction and in fact will not file my taxes if I want to take the deduction.

What a waste of the $225 I now have to pay him. I could have done this myself! As a matter of fact, I did my taxes on Turbo Tax before I even gave them to him. Lesson learned!

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