Can Rental Property Businesses Take a Home Office Deduction?
“Can I take a home office deduction for my rental property business?” It’s a hot debate in the real estate investor forums every year during tax time, but the answer hasn’t changed: It depends. We’d all like there to be a hard and fast rule to make this answer clearer. It really comes down to how you structure and manage your investment properties, though. To help you navigate this gray area, we’ve put together a review of the home office deduction and the questions surrounding it. Why is there a debate? Who qualifies for the deduction? Is taking the deduction worth it? We’ll cover all those and more. Let’s get started.
The Home Office Deduction Debate
Many sources tell you that rental property is an investment, not a trade or business. From this viewpoint, an investment doesn’t need an office, which means an office wouldn’t be an ordinary or necessary expense. The IRS wouldn’t consider it deductible. Some people back up this idea by reminding us that the Schedule E instructions don’t mention home office deductions.
The counterargument is that rental properties require regular, continuous management. Investors and property owners need office space to carry out those activities, meaning an office counts as a necessary or ordinary expense. The IRS would allow that as a deduction. Plus, we have legal precedent: in Curphey v. Commissioner, home offices became allowable as an expense against rental business income.
So the debate really hinges on whether your rental properties qualify as a business.
Qualify as a Business
If the hurdle is qualifying as a business, how do you do that?
The IRS’s working definition of a trade or business is regular, continuous involvement in an activity with the primary purpose of making a profit.
Think about how you’ve set up your rentals and consider these questions:
• How many properties do you have?
• Are they short- or long-term leases?
• How much time are you devoting to your business?
• If you hire help (like a broker, property manager, or virtual assistant), how many hours is that person working on your business?
Documentation is your friend here. Track your activities to show that you are regularly, continuously, and systematically involved in your rental business. It’s also helpful to record your reasoning for why your rental property is a business. If you’re ever audited, it’s handy to have that logical defense ready.
If you’re ready to declare your rental units as a business, pause for a moment. Make sure your procedures will pass a few simple checks that show you are operating on a business level. Are your business and personal accounts separate? Is your business registered? Do you issue 1099 forms? One common error that the IRS finds is that property owners fail to file 1099 forms. That oversight disqualifies filers from the home office and pass-through deductions, along with section 179 and startup expenses.
Your properties may require regular but minimal involvement. If that’s the case, you may not count as a business and wouldn’t qualify for the home office deduction. If you aren’t certain whether your real estate investments count as a business, talk to a CPA with rental property experience to discuss your situation.
Designate a Home Office Area
Ok, you’ve proved that your real estate investments count as a business. Now let’s talk about what counts as a home office. For that matter, let’s get clear about what the IRS considers a home.
What Counts as a Home?
The IRS will consider any property providing basic living accommodations as a home. Houses, condos, apartments, boats, mobile homes—they all count. Even separate structures on a property qualify as homes. Think about unattached garages, studios, or barns; those count too. However, any part of your property used only as rental property does not count as a home. So if you rent out that unattached garage or studio, it no longer counts as your home.
What Counts as a Home Office?
The key thing to remember with your business’s home office is that you must use the space regularly and exclusively for business activities. If you work at your kitchen table, in your dining room, or in your family room, those areas won’t count as a home office. You don’t use them just for business.
Your home office doesn’t need to be an entire room, though. It’s fine to set aside a portion of a room to use for your office. Or you can use a separate structure, like a studio or unattached garage. Just make sure you use that area frequently and only for your rental activities. Occasional use won’t cut it. This is when documentation comes in handy again.
Prove Business Use
To prove that a home office is for business use, keep records documenting how you spend your time there. Meeting any of these three criteria will help cement your business status.
1. You perform administrative or management work in the home office.
2. You meet business visitors at the home office.
3. You perform most of your important rental activities at the home office.
Limit or remove personal items from the space. This is where you should keep your rental property-related items:
• Account books and financial records
• Tenant billing and leases
• Schedules of showings
• Storage for rental signs
• Contracts for property managers, contractors, or virtual assistants
Benefits of the Home Office Deduction
Taking the home office deduction has several benefits.
Shift Household Expenses to the Business
When you take the home office deduction, some personal household expenditures that usually aren’t deductible become business tax deductions.
Some of the household costs that you would normally deduct on Schedule A (if you itemize) move to Schedule E, reducing your net income. Since the Tax Cuts and Jobs Act limited some Schedule A deductions, this makes a difference for many investors.
Eliminate Commuting Mileage
When you don’t have a home office, any mileage from your home to your first business stop counts as nondeductible commuting miles. But with a home office, you don’t have any commuting miles to or from your rentals if they are within your tax home area. (That’s about 50 miles of your home office.) Any travel between your home office to your flips or rentals counts as business travel.
If you have rentals outside of your tax home area—over 50 miles away—traveling to and from those rentals also counts as business travel.
Just remember that any travel between your home office to your flips or rentals counts as business travel, which is deductible. So make sure to track your trips to increase your deductions at tax time.
Real Estate Professionals
Having a home office also makes it easier to qualify for the real estate professional designation. To qualify as a real estate professional for the IRS, you must meet the 750-hour requirement. Since having a home office eliminates commuting miles, your travel time now counts toward the required hours.
Takeaways
Whether you can claim a home office deduction for your investment properties depends on your situation. When you qualify as a business, you may take the deduction. If you aren’t sure your real estate investments count as a business, discuss your situation with a CPA who has experience working with rental property owners. There’s no reason to miss out on the benefits that come with the deduction if you qualify for it. And when you need help tracking expenditures and deductions for your rental properties, REI Hub is here for you. We designed our software for real estate investors, so it comes with built-in Schedule E reports at the property and portfolio level. Try it today!
