Home Office Deduction for Rental Property: What You Need to Know
Learn how to navigate home office deductions for rental properties, including eligibility, claimable expenses, and accurate reporting methods.
For property owners renting out real estate, understanding tax benefits like the home office deduction is essential. This deduction allows taxpayers to claim expenses for a portion of their home used exclusively for business purposes.
Qualifying for Home Office Deductions
To qualify, the space must be used exclusively and regularly for business. It cannot double as a personal space, such as a guest room. According to IRS guidelines, the space must serve as the principal place of business, a place to meet clients, or a separate structure like a studio or garage.
The exclusive use test requires that the area is solely dedicated to business activities, while the regular use test demands consistent use. Occasional use, such as working in the space only a few times a month, doesn’t meet IRS standards. Maintaining a log of business activities can help substantiate claims.
Additionally, the taxpayer must be engaged in a trade or business. Employees working from home are generally excluded unless specific conditions are met, such as their employer requiring the arrangement. The Tax Cuts and Jobs Act of 2017 eliminated the home office deduction for employees through 2025 unless reimbursed by their employer.
What Expenses Can Be Claimed
Qualifying expenses fall into two categories: direct and indirect. Direct expenses are entirely related to the business portion of the home, such as repainting or repairing the office space. Indirect expenses, like utilities or mortgage interest, apply to the entire home and are deductible based on the percentage of the home used for business. For example, if the home office occupies 10% of the home, 10% of these expenses may be deductible.
Homeowners can also claim depreciation on the office space to account for wear and tear. The IRS provides guidelines for calculating depreciation using the Modified Accelerated Cost Recovery System (MACRS).
Methods to Calculate the Deduction
Taxpayers can choose between the simplified method and the regular method to calculate the deduction. The simplified method offers a flat $5 per square foot for the home office, up to 300 square feet, with a maximum deduction of $1,500. This method is straightforward but may result in a smaller deduction.
The regular method, while more complex, often provides a larger deduction. It requires calculating the percentage of the home used for business and applying that percentage to indirect expenses, while direct expenses are fully deductible. This method involves detailed recordkeeping and completing Form 8829 to calculate expenses for business use of the home.
Reporting the Deduction on Forms
Home office deductions are reported on Schedule E (Form 1040), which captures rental real estate income and expenses. Taxpayers must accurately report the portion of home expenses attributable to business use.
Form 8829 calculates and reports business use expenses, feeding into Schedule E. Errors in these calculations can lead to audits or penalties, so precision is critical. Taxpayers must provide a detailed breakdown of direct and indirect expenses, supported by documentation.
Recordkeeping for Accuracy
Accurate recordkeeping is essential to support home office deduction claims. Without proper documentation, deductions may be disallowed, and penalties could result. Taxpayers should keep receipts, invoices, and statements for all business-related home expenses, organized by category, and clearly distinguish between direct and indirect costs. Accounting software can simplify this process.
Maintaining records of the home office’s size and usage is equally important. Measurements, floor plans, and photos can substantiate claims. A log of business activities conducted in the space demonstrates regular and exclusive use. Records should be retained for at least three years after filing the tax return. If depreciation is claimed, records must be kept for as long as the property is owned, plus three years after its sale, to address potential recapture issues.