The Home Office Deduction for Rental Property Owners

Establishing a home office is a powerful tax strategy, not just for sole proprietors and corporations but also for landlords managing rental properties. By meeting specific requirements, landlords can deduct home office expenses on Schedule E, reducing their taxable income and maximizing financial efficiency.

Operating Your Rentals as a Business

To claim the home office deduction, your rental activity must qualify as a "trade or business" under tax law. While this might sound daunting, most landlords meet this requirement as long as their involvement in rental activities is regular and continuous. Importantly, time spent by agents, property managers, or assistants on your rental properties also counts toward meeting this standard.

The determination of whether your rentals qualify as a business depends on individual facts and circumstances. Numerous court cases provide clarity on what constitutes sufficient involvement, even for landlords with just one property. If you’re uncertain about whether or not your rentals qualify, it’s recommended to discuss the home office deduction with your CPA.

Defining the Qualifying Home Office Area

To claim the deduction, you must designate a space in your home exclusively and regularly used as the principal place of business for your rental activities. This space could be a dedicated room or a section of a room but, importantly, it cannot double as a personal living space, like a kitchen table or living room couch.

Tax law also allows for a home office to be used primarily for administrative or management activities if no other fixed location is available for those tasks. For landlords who do not have separate office space, this provision effectively designates their home office as their primary place of business.

The Financial Benefits of Claiming A Home Office Deduction

Establishing a home office for your rental properties offers two major advantages:

1. Turning Non-Deductible Expenses into Deductions: Ordinary household expenses, such as utilities and insurance, can become partially deductible as business expenses.
2. Shifting Deductions from Schedule A to Schedule E: Moving expenses to Schedule E avoids the limitations imposed by the Tax Cuts and Jobs Act on state and local tax deductions and mortgage interest deductions.

Eliminating Commuting Miles

A qualifying home office eliminates the classification of commuting miles as non-deductible. Instead:

• Travel from your home office to rental properties within your "tax home" area (typically within 50 miles) is considered business mileage and becomes deductible.
• For properties outside your tax home, all travel to and from the rentals is deductible business mileage.

Learn more about tracking and claiming mileage deductions here →

Real Estate Professional Benefits

Qualifying for the real estate professional status (REPS) under tax law provides further advantages, including the ability to deduct 100% of rental losses. Having a home office strengthens your case for meeting this classification because the travel time to and from rental properties counts toward the required 750 hours of material participation.

Claiming Your Deduction

While Schedule E instructions do not explicitly address home office deductions, tax law permits landlords to deduct ordinary and necessary business expenses, including a home office. Precedents such as Curphey vs. Commissioner affirm the validity of home office deductions for rental businesses.

How to Calculate Your Home Office Deduction

For landlords who manage their rental properties from home, claiming the home office deduction can provide significant tax benefits. However, to maximize this deduction, it’s crucial to calculate it correctly based on the IRS home office guidelines.

Step 1: Determine the Size of Your Home Office

To begin, measure the area of your home that is used exclusively and regularly for rental business activities. This can be a room or a designated space in a room, such as an office corner. The key is that the space must be used only for business purposes and not for personal activities.

Step 2: Choose Your Calculation Method

There are two primary methods to calculate your home office deduction: the simplified method and the regular method.

1. Simplified Method

The IRS provides a standard deduction of $5 per square foot of your home used for business, up to a maximum of 300 square feet. This means the maximum deduction under the simplified method is $1,500 per year.

This method is easy to apply and requires minimal documentation, making it an excellent option for landlords who have a small, straightforward home office.

2. Regular Method

The regular method requires a more detailed calculation. First, calculate the percentage of your home’s total square footage that is used exclusively for business. For example, if your home is 2,000 square feet and your office space is 200 square feet, your business percentage is 10% (200 ÷ 2,000).

Once you have the percentage, apply it to various deductible home expenses, such as:

• Rent or mortgage interest
• Utilities (electricity, water, etc.)
• Homeowner’s insurance
• Property taxes
• Repairs and maintenance

For example, if you spend $2,000 on utilities each year, you can deduct 10% of that amount ($200) for your home office.

Maximize Your Home Office Deduction with Landlord Studio

Leveraging property management and accounting software like Landlord Studio can simplify claiming the home office deduction and ensure no expense is overlooked. Here's how:

Track and Categorize Expenses

Landlord Studio allows you to:

• Record home office-related expenses such as utilities, internet, and insurance.
• Categorize expenses using default expense categories in line with IRS requirements
• Reconcile expenses for fast and accurate reporting.
• Track expenses on an organizational level and on a property-by-property basis.
• Use the built-in GPS mileage tracker to maximize mileage claims.

Learn more about Landlord Studio’s rental accounting tools →

Organize Essential Documentation

Easily store and access receipts, invoices, and other records required to substantiate your home office claim.

Generate Tax-Ready Reports

Export detailed financial reports that streamline tax preparation and provide clear evidence of home office expenses for Schedule E reporting.

Learn more about Landlord Studio’s reporting tools →

Simplified Tax Compliance

Landlord Studio's intuitive interface is designed to make tax compliance easy. Save time, reduce accounting errors, and claim every allowable deduction.

By utilizing a platform like Landlord Studio, landlords can stay organized, track eligible expenses, and confidently maximize their tax savings year after year for a more profitable rental portfolio.

Create your free Landlord Studio account today and take your rental property accounting to the next level.