Deduct Your Home Office - Benefits and Risks

Author: Anthony Seruga and Yolly Bishop

If you're a commercial real estate investor with a home based business, it may be very tempting to just deduct the cost of your home office - measure off that corner of the dining room you use, figure out the percentage of the home space it actually is, round up a little, and subtract that percentage of your regular home expenses. No problem, right?

Wrong. Deducting your home office for your home based business can get you a nice deduction, but it's not so simple as subtracting out a percentage of your home expenses. Instead, you need to itemize everything, make sure everything is exactly the way it says it is, and ensure that you follow all the rules, just like a commercial real estate investor with a corner office.

Rules Around Home Office Deductions

Every commercial real estate investor must know how the rules around home office deductions work, not only for themselves but also for their clients who may have questions when first entering the real estate investment world.

First, you must use the area you're deducting with some regularity for your home based business - not necessarily every day, but at least once or twice a week. Second, you have to use that area exclusively for your commercial real estate business. That means a corner of the dining room table is out. You need to have a formal space that you're using for your home-based business only, and you need to be able to prove it.

Another reason a corner of your dining room is out: you must use your home office as a place where you meet or deal with clients and customers, or it must be your principle place of business; in other words, it must be the place where you perform the bulk of or all of your administrative duties. It must be set off from the rest of the house, though it does not have to have a permanent partition. Your commercial real estate business must truly be a home based business to deduct your home office.

The good news is you'll be able to deduct more than you may have thought. If you fit the requirements, you can deduct a portion of your real estate taxes, your mortgage interest or your rent, your utilities, insurance depreciation, and any painting or repairs that affect that portion of the house where your home office is located. If you have to remodel a room to create a home office for your commercial real estate business, you should be able to deduct that as well.

How to Determine Deduction Amount

If you are able to deduct your home based business office for commercial real estate, there are two different ways you can determine exactly what your deduction amount should be: the area method and the room method. In the area method, you measure the amount of square feet your office takes up in your house, determine what percentage of the house that is, and use that number applied to acceptable expenses. In the room method, you count the number of rooms in your house, and subtract the percentage your home office makes up of these rooms (so 4 rooms is 25%, 5 rooms 20%, etc.). This is acceptable if all the rooms in your house are roughly the same size.

Next, you'll have to figure out direct, indirect, and unrelated expenses in your home. Any expenses you use for your commercial real estate business office alone are direct expenses, and are deductible in full (subject to a limit), so if you remodel your office to be a perfect location for commercial real estate investors, you can deduct the remodeling expense in full, and if you have a fax line installed, that too is a direct deduction.

Indirect deductions are those that affect your entire house: roof repairs, gutter cleaning, utility bills, and taxes. For these, you can deduct the percentage of expenses that you figured your home office to be. -- So for a $1000 roof repair, you can deduct the 20% that contains your home office -- $200.

Any expenses affecting exclusively parts of your home that your home office is not in cannot be deducted at all. These are unrelated expenses and include such things as kitchen remodeling and lawn care (unless you can argue that since your customers come to your home, you need a nice looking lawn).

There is also a deduction limit. You must make a profit in order to deduct 100% of your expenses. Your commercial real estate business profits must exceed your business expenses in order to deduct 100%. If your business expenses, including expenses related to your home office, exceed your income, you may only deduct up to the total income amount; your home office expenses may not turn your home based business into a loss venture.

You also must not take double deductions for anything, from interest to insurance. And if you sell your home while still using the office as a deduction, you'll have to pay capital gains on the portion of the home you've been deducting.

Risks of Deducting Home Offices

Into every home based business some rain must fall, and in this case the rain is in the form of misunderstandings and errors. The IRS doesn't really care if you make a mistake; they want your money plus penalties and interest.

Your tax return for your home based business must be spot-on if you're deducting your home business. A sloppy return with math errors can cost you big time. And don't even consider cheating; higher-than-average deductions will trigger an audit, and you'll get caught.

Overall, if you're ready to do the work, and you're ready to dedicate part of your home to your home based business, you'll be able to deduct some significant expenses. Beginning commercial real estate investors can rejoice.

About the author:
Tony Seruga, Yolanda Seruga and Yolanda Bishop of Maverick Real Estate Investments, Inc. work with builders, developers and other players in the commercial real estate industry to acquire and develop properties. They use progressive investment strategies that have proved extremely profitable. In addition to their own deals, they teach both seasoned and inexperienced investors how to be big players in the game. Visit the website for more info