The Home-Office Deduction for Rental Property Owners
As you probably know, establishing a home office for a Schedule C or corporate business creates valuable tax deductions.
But this deduction is not exclusive to sole-proprietorship, partnership, or corporate businesses. If you have rental properties, you can establish a home office to manage your rental properties and deduct the cost on your Schedule E.
Rentals as a Business
The first hurdle is that your rental activities have to qualify as a “trade or business” under the tax law.
Lucky for you, that’s relatively simple—you’ll need regular and continuous involvement with your rental activities to meet this requirement. Most rental owners meet the criteria, even if you have only one rental property. The time your agent (e.g. property manager, employee, or virtual assistant) spends on your rentals counts to meet this requirement as well. Whether or not your rental activities are a trade or business depends on the facts and circumstances of your particular situation…and there are many court cases that give us guidance on that.
Qualifying Area
Your second hurdle is setting aside a physical space in your home that qualifies for the home-office deduction. For this to work, you need to use that space in your residence regularly and exclusively as the principal place of business for your rental activities. For example, the space can be an entire room or a portion of a room. But it cannot be your kitchen table or the living room couch as those are not exclusively used for business. Again, there are actual court cases to give us guidance in these details.
This might sound hard, and it was hard—before lawmakers changed the rules to include, as a principal place of business, the space you use for administrative or management activities, provided there is no other fixed location where you conduct substantial administrative or management activities. If your home office is your only office (as in you don’t have a separate location you rent or own and use for the rental business too), then by default your home office is your primary place of business.
Home-Office Deduction
Establishing a rental property home-office does a couple of important things to your household expenses:
Turns non-deductible personal household expenses into business tax deductions.
Moves a portion of the household expenses normally deductible on Schedule A (only if you itemize) to your rental properties on Schedule E.
That second bullet point is especially important after the passage of the Tax Cuts and Jobs Act put a $10,000 limit on your Schedule A state and local tax deductions, and lowered the amount of your mortgage on which you deduct mortgage interest from $1 million to $750,000.
Eliminate Commuting Miles
Remember to track your rental business miles.
Without a qualifying home office, the mileage from home to your first business stop and then from your last business stop back to your home is non-deductible “commuting mileage”.
But, here is what happens with the rental property’s principal office in your home:
You have no commuting mileage from your home-office to and from your rentals if the rentals are in the area of your “tax home” (say, reasonably within 50 miles of your home-office).
You establish your rental property “tax home” as your home-office, and if your rentals are outside the area of your tax home, then the mileage from your home to and from the rentals is deductible business mileage because you are traveling outside the area of your tax home.
Real Estate Professionals
If you qualify as a real estate professional under the tax law, then you can deduct 100 percent of your rental losses in the year you incur them.
But there’s a big hurdle to the tax law classification as a “real estate professional”. To qualify as a real estate professional, must show that you spend
more than 50 percent of your personal service work time in real property trades or businesses in which you materially participate, and
more than 750 hours of service during the tax year in real property trades or business in which you materially participate.
Having a rental property home office that qualifies as a tax-code-defined principal place of business makes it easier to qualify as a real estate professional as the time spent on deductible travel to and from your rental properties counts toward the time requirements. Does it take you an hour to travel to your rental property, then an hour to get back home? That adds up fast toward your 750 hours.
Claiming Your Deduction
The Schedule E instructions not only fail to provide any explanation about where to put your home-office deduction, but they also do not even mention a home office.
But the instructions do say that you can deduct ordinary and necessary business expenses, and the home office meets that rule. Also, as established in Curphey vs. Commissioner (a precedent-setting case), the home office is allowable as an expense against income from a rental business.
