If you own a real estate investment business, you may be missing out on one of the largest tax write-offs – a home office.
Most people recognize the need for a home office when you work from home or run a business from home, but many real estate investors overlook the need for an office when they run a real estate business.
If you own rental properties (one or more), you can also take advantage of the home office deduction on your Schedule E.
How Real Estate Rentals are a Business
Here’s what most people don’t realize – running a real estate business is a legit business. According to the IRS, you must be able to prove that you have a ‘business’ to take the deduction. To prove you have a business, you must prove you are regularly involved in the business’s operation.
If you are a landlord, you operate in the business’s daily operation and are continually involved. If there’s any grey area with your business, I can help you determine if you qualify.
Setting up your Space
Here’s where things get tricky. You must have a separate space in your home that you use ONLY for your home office.
You can’t double up your family room as the office or your bedroom – it must be an area you exclusively use for your business. You don’t have to prove what you do there – you can say administrative or management work, that’s all that’s required, but you must prove you have the square footage to dedicate to your workspace.
Taking the Home Office Deduction
Once you establish an area of your home as your home office, you can take the home office deduction. This means you can take more tax deductions on standard household expenses that you otherwise couldn’t take. It also means you’ll write off those household expenses on Schedule E rather than Schedule A, which the average taxpayer uses for deductions. This may help you secure more tax write-offs since you aren’t restricted to the $10,000 Schedule A state and local tax deduction limit or the lower mortgage limit of $750,000, versus $ 1 million.
The Downside of Taking the Home Office Deduction
Like any tax issue, there are downsides. If you take the home office deduction, you eliminate the commuting deduction you’d get. Without a home office, you can write off the commuting mileage you do when visiting properties. If your properties are within a specific radius (usually 50 miles) and you have a home office, you can’t write off the mileage any longer.
But, if you have rental properties outside of your radius, you may be able to deduct the mileage because you’re traveling outside your ‘home area.’
Other Ways to Reduce your Tax Liability
If you have a home office, you may also be able to qualify as a real estate professional according to the IRS. Even if you own rental properties, you aren’t automatically considered a real estate professional in the eyes of the tax code.
To be recognized as a real estate professional, you must spend at least 50 percent of your time operating your real estate business. In other words, you must prove you participate in it regularly. You must also prove you spend at least 750 hours working on your real estate business a year.
If you travel to your properties outside of your radius, you can count the commuting time toward your 750 hours, making it even easier to qualify as a real estate professional.
Filing Schedule E
As a real estate investor running a business, you must file Schedule E to get your home office deduction. Your home office is a regular business expense, which is an allowed deduction on your taxes, helping you reduce your taxable income and decrease your tax liability.
If you would like help figuring out your rental real estate business, contact us today and let us help you get on the right track.