With so many people working from home, I am often asked about deducting home office expenses. Self-employed taxpayers may claim a business deduction for expenses arising from qualifying use of all or part of a residence. Employees are no longer allowed to deduct home office expenses. To claim a deduction the dwelling must be one of the following:

• The principal place of business
• A place to meet clients or customers in the normal course of business
• A separate structure not attached used in connection with the business
• If the dwelling is the only location, space within must be used regularly to store inventory or product samples

Exclusive and Regular Use

In all cases, a home office must be used regularly and exclusively to conduct business. Incidental or occasional use of an area is not regular use, so expenses related to such use are not deductible. It doesn’t have to be a completely isolated space as the IRS will allow for a “separately identifiable space”. The IRS is very strict in its interpretation of exclusive use, so a television or children’s toy’s in the exclusive zone may disqualify the space – except for special rules pertaining to daycare facilities.

Principal Place of Business

If a taxpayer has multiple work locations, he may need to assess where the principal place of business is. The taxpayer should consider the importance of activities conducted, the amount of time spent there, and whether another location could compete as the principal place where work is done. A home office can be the principal place of business even if the taxpayer doesn’t spend most of his or her time there, provided it is the only place used for administrative and management activities. For example, a home builder earns most of his or her revenue on the job site, but can still have a home office for bookkeeping and scheduling. A side benefit of a qualifying home as the principal place of business is the ability to deduct travel expenses between home and work locations.

A Place to Meet Patients, Clients, or Customers

Using part of the home to meet clients can allow for more flexibility and can be deducted even if there is another principal place of business. For example, a Financial Advisor may work from the office 3 days per week and meet clients in the home office 2 days per week, the home office qualifies for a deduction because the activity is substantial and integral to the business.

Calculating the Deduction

The home office deduction is computed by categorizing the direct vs indirect expenses of operating the home. Direct expenses such as carpeting and painting the office are fully deductible. Indirect expenses are allocated pro-rata between business and personal use. Any reasonable method can be used, with the ratio based on the square footage being the most common. Indirect expenses would include real estate taxes, mortgage interest, rent, utilities, insurance, depreciation, repairs, and maintenance. Not all indirect expenses are deductible, for example, lawn care is not a service used in the business.

Deductions for the home office are limited to the gross income generated by the business. Deductions that are limited can be carried over to the next year subject to the same income limitation. It is possible to never take advantage of the deductions if business deductions exceed business income.
There is also a Simplified Method that allows taxpayers to avoid the record-keeping and complex calculation of the actual expense method. Taxpayers can use the prescribed rate of $5 per sq foot up to 300 sq. ft. There is no carryover when using this method.

There are many rules to follow, however, it can be a great way to reduce your taxes if you are self-employed. Be sure to consult with me if you think you may qualify for a home office deduction.

Can I write off my home office?

One of the (obviously) super common everyday norm’s for a real estate agent (even before the Covid world changed) is the ability to work wherever and whenever you like. So, naturally, the next question we get is agents asking if they are allowed to write off their home office. The answer? It depends.

IRS rules on home offices are very clear. First and foremost, you cannot have a space provided to you. So take me, I have a beautiful (if I do say so myself) office within my physical office location. If someone else is sitting there I could theoretically make them move (politely, of course) because it’s MY office. This immediately kicks me out of being able to claim any of my home expenses for working remotely (which I do) because I am choosing to work remotely for my convenience, there is an office provided to me that is exclusively mine. This is typically an easy one for agents to overcome as you typically do not have an office space exclusively provided to you. You may have a communal workspace provided by your broker, typically on a first come first serve basis, but if today is the day that every agent decides to hit the office, you would be out of luck. If this is you- you meet the requirement just discussed. Now watch out for what you are paying for- some brokers offer a desk rental fee to their agents guaranteeing them a workspace, this may knock you out (because no you ARE guaranteed one).

Next step- you must have space specifically designated for business. It can’t be your dining room table or your couch in the living room- however, it also does not have to be an entire room designated either. The home office write-off works off square feet, so if your guest room does double duty as your office but also has a bed in it for overnight guests, as long as you are only including the square feet of the area for your office, you are ok. As soon as you include the guest living quarters square feet, you broke the rule. Work “areas” definitely count if you do not have a physical, drywalled-in, office. Assuming you DO meet this rule and you DO have a work office/space that is exclusively for you to work in…. you have a home office!

This will then allow you to take a percent of your home expenses, as they relate to the area of your home that is your office. So, if your office area is 7% of your home, you would (hypothetically) be able to write off 7% of your home expenses. This would include items such as your rent, mortgage interest, property taxes, homeowner’s insurance, flood insurance, utilities, etc. Anything you pay that is required for the use of your home (that contains your office) is worth discussing. Things to shy away from pool maintenance and landscaping fees. This is typically not a large deduction (if it is large expect an audit), but it may be something you are entitled to. Also, keep in mind there IS a safe harbor for his of $5 per (office) square feet, with maximums on this, but please talk to your tax professional to see which would work best for you.

Can I write off my phone and internet?

In today’s world, it is SO common for people to use their personal cell phones and home internet for many facets of their lives, including personal social scrolling, a virtual school for their kids, and running their business. Have a look at another post I wrote to see if you are eligible for a home office deduction. Logically, this leads us to another commonly missed expense on our real estate agent’s tax returns: Home internet and personal cell phone used for business.

If you read my blog (or listened to my podcast!) on home offices, you know you are only allowed to take a percentage of your home expenses for business since your home likely does double duty as your office, but also your personal haven and kids chaos center. Here’s my fun fact: I do not believe that home internet and cell phone use should be limited to your home office percent! So, if your office is 7% of your home, you take 7% of allowed home expenses as a write off, I never include home internet and personal cell phone in that. The reason? You likely use both of this WAY more than 7% for your real estate business!!!! Usually, that percent is much closer to 75-85%, actually. While, again, these are not large expenses, they are expenses you are likely entitled to (I have yet to meet an agent that does not use these in some capacity for business).

Now, tips of the trade… NEVER use 100%, unless you’ve got an entirely separate phone (for example) for your personal life. You can take your best, most reasonable estimate as to how much you use your phone for business vs. personal, typically it’s high on the business end in your world, but taking 100% is (a) risky and (b) not true. I suspect you at some point call your mother, your husband, your friends, etc. be realistic with this. Same for your internet, I know you book vacations (although who knows in today’s world), your kids surf youtube, etc. Take that into account and do not take 100%.

We often time see cell phones and the internet either left off on tax returns, or put on, but subject to the home office deduction (meaning less of a write-off. 75% > 7%). Definitely keep your eye on this, and when you are pulling your tax documents together, don’t forget to include this for your tax pro!