Using your RE business to write off a home office in your taxes.

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Using your RE business to write off a home office in your taxes.

Luke Holmes
Northern California · Member since 2019 · 3 posts · 1 vote

Hello everybody. I'm a new investor and I've recently become very interested in the small tax write offs that I can begin taking advantage of to refine my strategy on taxes. One such strategy can be claiming a home office. 10 or 20 years ago this was a red flag for the IRS, but times have changed and the IRS has even made public statements saying that they recognize the increase in home offices.

With April looming, what strategies do you use to qualify your real estate business for a home office (assuming you don't have another office)? Do you use a LLC or other legal entity and write the deduction off under it? How about presentation and documentation of the space? Is it its own room or is it just a desk in the hall?

Thank you!

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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
7y

@Luke Holmes

Sounds like you've been Grant Cardone-d. :)

Claiming home office is not "a strategy" at all. It is a legitimate deduction for a profitable business that uses a space in your home. Making a profit is step one. No profit = no home office deduction.

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    7y

    @Luke Holmes

    Sounds like you've been Grant Cardone-d. :)

    Claiming home office is not "a strategy" at all. It is a legitimate deduction for a profitable business that uses a space in your home. Making a profit is step one. No profit = no home office deduction.

    2Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    7y

    @Luke Holmes the space needs to be used exclusively for business. Whether your business is a separate entity or a sole proprietorship does not affect whether it is a deductible expense. I simply took a picture of my office.

    1Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
    7y
    Originally posted by @Luke Holmes:

    Hello everybody. I'm a new investor and I've recently become very interested in the small tax write offs that I can begin taking advantage of to refine my strategy on taxes. One such strategy can be claiming a home office. 10 or 20 years ago this was a red flag for the IRS, but times have changed and the IRS has even made public statements saying that they recognize the increase in home offices.

    With April looming, what strategies do you use to qualify your real estate business for a home office (assuming you don't have another office)? Do you use a LLC or other legal entity and write the deduction off under it? How about presentation and documentation of the space? Is it its own room or is it just a desk in the hall?

    Thank you!


    You are right. If you truly have a space that you exclusively and regularly use as a home office, certainly take it. 

    It doesn't have to be the whole room either, it can be space within a room. 

    it will not qualify for the home office deduction if use is only occasional.

    What can be deducted:

    • Mortgage (If you use these expense as home office deduction, you cannot take the same portion of the expense as itemized deductions.)
    • Interest
    • Property tax, homeowners association dues and insurance
    • Cost of cleaning, utilities
    • Phone Service ( can't deduct the first home line - even if you use for business) 
    • Internet
    • Security
    • maintenance, pest control, repair, and home improvements
    • Depreciation ( over 39 years- Home office is considered non residential) 

    You can also use Safeharbor deduction $5 per square foot. There is no depreciation recapture when you sell the home if you use a safe harbor. 

    Income Limitation.

    The deduction for business use of the home (other than from otherwise deductible expenses, such as mortgage interest and real estate taxes) is limited to net income from the business. The deductions cannot create or increase a loss from the business.

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    7y

    The cheerleading answer by @Ashish Acharya is well-intentioned but misleading. No wonder it received an up vote by @Luke Holmes, because it sounds like a green light when it should be red.

    Step 1. Net profit. If you made $10k in assignment fees and spent $15k on marketing and education - your business has a net loss of $5k. Game over, forget home office even if you have a legitimate one. Ditto if you had no income yet.

    Step 2. Designated area. Does not have to be a room, but has to be a specific area.

    Step 3. Regular and substantial use. Not half-hour after work on Wednesdays.

    Step 4. Exclusive business use. Cannot use this "desk in the hall" to watch Netflix or entertain guests. Not even once.

    Step 5. Calculation. You take percentage of what Ashish listed. If your business area is 100 sq ft, and the home is 2,000 sq ft - then you take 5% of all this cool-sounding stuff: mortgage interest, taxes, insurance, depreciation etc.  Alternatively, you take $5 per sq ft. Both methods need to be prorated for the number of months the home office was used, if not all year.

    Internet and phone service are not part of home office deduction at all. They are a separate deduction based on business use % and not restricted by home office rules. Available with or without home office.

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  • Matt M.
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    7y

    @Luke Holmes

    I am a self employed contractor and investor. I have a dedicated room as my office, not worth it to me to send up red flags for a small write off.

    1Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
    7y
    Originally posted by @Michael Plaks:

    The cheerleading answer by @Ashish Acharya is well-intentioned but misleading. No wonder it received an up vote by @Luke Holmes, because it sounds like a green light when it should be red.

    Step 1. Net profit. If you made $10k in assignment fees and spent $15k on marketing and education - your business has a net loss of $5k. Game over, forget home office even if you have a legitimate one. Ditto if you had no income yet.

    Step 2. Designated area. Does not have to be a room, but has to be a specific area.

    Step 3. Regular and substantial use. Not half-hour after work on Wednesdays.

    Step 4. Exclusive business use. Cannot use this "desk in the hall" to watch Netflix or entertain guests. Not even once.

    Step 5. Calculation. You take percentage of what Ashish listed. If your business area is 100 sq ft, and the home is 2,000 sq ft - then you take 5% of all this cool-sounding stuff: mortgage interest, taxes, insurance, depreciation etc.  Alternatively, you take $5 per sq ft. Both methods need to be prorated for the number of months the home office was used, if not all year.

    Internet and phone service are not part of home office deduction at all. They are a separate deduction based on business use % and not restricted by home office rules. Available with or without home office.

     Micheal, 

    I am pretty sure based on his post, luck is smart enough to understand that you can take entire expense as a deduction. 

    Also, are you suggesting that without the home office, you can claim that your home internet or home phone service are deductible business expense based on percentage use? 

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    7y

    Yes. You have a reason to disagree? 

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  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    7y
    Originally posted by @Matt M.:

    I am a self employed contractor and investor. I have a dedicated room as my office, not worth it to me to send up red flags for a small write off.

    Not really a red flag if you qualify.  

    0Reply
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