Home office requirements for rental properties
Having an office in your home can provide valuable tax benefits for owners of rental properties. It turns non-deductible household expenses into tax deductions. Since the deduction for having a home office doesn’t require any additional expenditures, it’s like getting a free tax deduction. However, you must meet the IRS requirements to qualify for the deduction.
Most rental activities qualify as Section 162 trade or business activity under the tax law.
Your rental activities have to qualify as a “trade or business” under the tax law. You will need to meet several requirements.
You must use this space in your home regularly and exclusively:
- as the principal place of business for your rental activities,
- as a place of business used by your tenants for meeting with you, or
- in connection with the rental property business if the office space is in a separate structure that’s not attached to the dwelling.
The IRS Schedule E rental property instructions don’t mention a home office or provide any explanation about where to put your home office deduction.
You should calculate your rental property home office deduction by using IRS Form 8829 and put the home-office deduction on line 19 (“Other”), and list it as “home-office expense.”
You should allocate your deduction using a reasonable basis. Several options for basis for each property would be your amount of time spent, revenue received, or allocating equally to all the rental properties that you manage from your home office.
When your rental qualifies as a Section 162 trade or business, you can receive other significant tax benefits. These include:
- Deductions for traveling to and from your rental properties
- Business (versus investment) treatment of meetings, seminars, and conventions
- Tax-favored 1231 treatment when selling your rental property
Most rental activities will qualify as Section 162 trade or business activities. However, there is no bright-line test. You have to look at case law and make a judgment call. Several tax cases show how easy it is to qualify.
The Hazard case shows how easy it can be to qualify your rental as a business.
In this precedent-settling case, Mr. Hazard moved to Pittsburgh and rented his former Kansas City residence for about three years. After renting it for three years, he sold the property at a loss.
The tax court determined that Mr. Hazard used the property in a trade or business even though the court record has no mention of management activities by the owner.
The court ruled that Mr. Jephson had a business when he bought a house to rent, listed it for rent, and showed to prospective tenants but never rented it.
If you are not sure whether your rental property qualifies for Section 162 trade or business activities, I would recommend that you contact a qualified tax professional.
David Zubler is a tax accountant and Enrolled Agent representing clients before the IRS with over 25 years of tax experience. He is the author of four tax books, and is the founder and president of Your Tax Care. The company provides business and tax education to the public at its website, YourTaxCare.com. David can also be contacted by email at firstname.lastname@example.org