To start, there is no guidance that says you need a certain number of properties.  You could deduct a home office with just one property, but, you must prove you meet the tests below.

Test 1: Exclusive and Regular Use

To qualify for the home office deduction, your home office must be used exclusively and regularly for your real estate management. This means that the space cannot be used for any personal activities and must be your primary place of business.  As an example, if you use your kitchen as a home office but also have family meals there, that will not work.

The home office can be ANY dedicated space, including, but not limited to bedrooms, dens, parts of a basement, parts of a garage.  The space should be well documented, photographed and described in writing for audit protection purposes.

Test 2: Principal Place of Business

Your home office must be your principal place of business for your real estate management activities. This is determined by considering the relative importance of the activities performed at each location and the time spent performing those activities.  Most real estate investors do not have a separate office, so this should not be an issue. 

Separate Structure?

If your office is in a separate structure not attached to your home, such as a converted garage or a shed, you can deduct expenses related to that structure if it's used exclusively and regularly for your business!  Remember, if you are going this route, be sure to document and photograph as your deductions are likely to be higher than normal.

The IRS offers a simplified option for calculating the home office deduction. Under this method, you can deduct $5 per square foot of the office space used, up to a maximum of 300 square feet, for a maximum deduction of $1,500.   So the "lazy way" you will receive a maximum $1500 deduction. 

Regular Method

The regular method requires you to calculate the actual expenses of your home office. These expenses can be divided into direct and indirect expenses.

• Direct Expenses: Expenses that benefit only the home office, such as painting or repairs in the home office, are fully deductible.  This would also include any furnishing you buy for the dedicated home office such as a table, chairs, etc. 
• Indirect Expenses: Expenses for maintaining the entire home, such as mortgage interest, utilities, and insurance, must be allocated between the business and personal use based on the percentage of your home used for business.

Simplified Method

The IRS offers a simplified option for calculating the home office deduction. Under this method, you can deduct $5 per square foot of the office space used, up to a maximum of 300 square feet, for a maximum deduction of $1,500.   So the "lazy way" you will receive a maximum $1500 deduction. 

Regular Method

The regular method requires you to calculate the actual expenses of your home office. These expenses can be divided into direct and indirect expenses.

• Direct Expenses: Expenses that benefit only the home office, such as painting or repairs in the home office, are fully deductible.  This would also include any furnishing you buy for the dedicated home office such as a table, chairs, etc. 
• Indirect Expenses: Expenses for maintaining the entire home, such as mortgage interest, utilities, and insurance, must be allocated between the business and personal use based on the percentage of your home used for business.
  
  

Calculating Business Percentage

To calculate the business percentage, you can use either the square footage method or the number of rooms method:

• Square Footage Method: Divide the square footage of your home office by the total square footage of your home.
• Number of Rooms Method: Divide the number of rooms used for business by the total number of rooms in your home.

Mortgage Interest and Real Estate Taxes

A portion of your mortgage interest and real estate taxes can be deducted based on the percentage of your home used for business.  If you itemize your deductions, we will help allocate this but it allows you to deduct the maximum amount allowable.

Utilities and Services

You can deduct a portion of your utilities, such as electricity, heating, and internet service, as well as services like trash removal.

Repairs and Maintenance

Expenses for repairs and maintenance that benefit the entire home are partially deductible. Repairs specific to the home office are fully deductible.

Depreciation

You can depreciate the part of your home used for business over a 39-year period, based on the business-use percentage.  You get the rare "paper benefit" of depreciating your dedicating home office.   

If you have any questions on the home office deduction, please let us know!  This overlooked real estate investor tax benefit can chip away at your existing real estate taxable income OR help increase your passive losses, which can be offset with our PIG strategies (See PIG KB articles)!