Can I Claim a Home Office Deduction on My Rental?

You may know that you can deduct expenses for a home office, but what if your home office is in your rental unit? Does the fact that you rent instead of own property change the process? Using a home office deduction for renters can significantly reduce your income tax bill and free up money to invest in your home business. You can find ways to maximize your deductions, even in your apartment, this tax season.

Are you eligible for a home office deduction for your rental property?

If you’re self-employed and use a part of your home or apartment for business, you qualify for the home office deduction. The IRS considers three qualifications for people claiming a home office rental property tax deduction: exclusivity, precedence, and regularity.

• Exclusivity means that your working area inside your rental home office needs to be separate from other parts of the house and used only for business. Your office space needs to be in a different room or an identifiable area. You can’t use your kitchen as an office because you work at the table, but you can use your living room if you have an area used for business purposes that has boundaries, such as a desk. The exception to this rule is if you’re an at-home certified daycare provider.
• Precedence means that you have to use your home office as your principal place of business. You can swing by your local coffee shop every once in a while and do some work there, but if you’re not using your home office most of the time, then your living space doesn’t qualify.
• Regularity means that you have to regularly use your home office to qualify it as a home office. An example would be working as a freelance writer, doing several jobs a month, and only using your office for 12 hours a month. If this example describes you, then you probably won’t qualify. If you use your office several days a week regularly, you could still be eligible since your schedule is more structured.

If you’ve carefully reviewed this list and find that you meet the criteria for a home office deduction for your rental property, follow up with a tax professional to get the greatest deduction possible.

What are some typical home office deductions?

Home office deductions are available for renters and homeowners to apply to any residence. Whether you live in a large home or an apartment, you can use this deduction to offset what you owe. Choosing which method you use for this deduction may impact how much you can take off your tax bill. 

Mortgage interest, part of the rent, insurance, utilities, repairs, telephone, and security systems may all be possible deductions that you could claim as part of your rental home office deduction.

What is the regular method for deductions?

To use the regular method, you have to determine the actual expenses you pay out for your home office. When using this method, your home office’s area must be devoted to business use. If you use a whole room, you need to figure out what percentage of your home you use and calculate based on this percentage. You also must keep receipts and records of the actual expenses paid for your home office. 

This method enables tax filers like you to carry over the amount beyond gross income, allowing you to apply it to the following tax year.

What is the simplified method for deductions?

A newer, simplified method for home office deduction rental property expenses has also been available since 2013. This method can still significantly reduce the amount you owe on your tax bill. It’s determined by using a prescribed rate multiplied by the allowable square footage of an office instead of determining your actual expenses.

This method uses a standard $5 per square foot of dedicated office space, not to exceed 300 square feet. It also does not require you to keep receipts or records. The simplified method allows for the same deductions as the regular method, except for depreciation, and you can’t carry over the amount beyond gross income.

Do I have to be self-employed to qualify?

Many people wonder whether they have to be self-employed to claim a home office deduction for rental property. Luckily, the answer here is no. The home office deduction is also available to employees who work from home, but a few rules exist. You can’t claim your home office space because it’s easier for you to work from home; it has to benefit your employer. You also can’t claim the deduction if you’re living in a place where your employer pays the rent.

What tips should I keep in mind about deductions?

When filing your taxes, especially if claiming the home office deduction for a rental property, make sure you do the following:

• Keep records: Maintaining records is probably one of the single most important steps to take regarding your home office deduction claim. Keep receipts organized and somewhere that you can easily access if required to verify your expenses. You should be precise with recordkeeping, even if you’re using the simplified method described above.
• Calculate your expenses and the area of your home office appropriately: If you enter a space larger than the IRS thinks you should have for the size of your home, the revenue service is likely to deny your claim of your home office as used only for business purposes.
• Know what you can and can’t claim: Unless your cell phone is used 100% for work, you can’t claim it. Also, you can’t claim your total electricity or internet bill. Certain states give renters a tax credit, but not all 50.

Consult with a tax professional if you decide to claim the home office deduction. This individual can assist you with what you can and can’t claim and help you decide which filing method works best in your situation.