Do you manage your real estate business from home? The IRS is fairly generous about allowing you to deduct home office expenses from your income, but only if you meet certain criteria. You must have an area of your home set aside exclusively for work, it must be a principle place of business (although it can be a second location if you maintain space elsewhere), and you must use that space regularly to manage your business. In other words, sitting on your couch using your laptop doesn’t constitute a “home office,” and a desk you never use in an empty bedroom doesn’t count either. If you meet the criteria, good recordkeeping will help you save a bundle in taxes.
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The IRS introduced a Simplified Option in 2013 that is much easier for most home businesses. You get a standard deduction (currently $5 per square foot) for a home office of up to 300 square feet in size. So if your home office is in a 10-by-12-foot bedroom, that’s 120 square feet or a $600 deduction. The advantage of the simplified method is that you don’t have to keep records of each household expense. The disadvantages are that you might get a much smaller deduction this way, and you can’t claim any depreciation expenses related to your home systems.
Under the regular method, you calculate your home office as a percentage of the overall square footage of your home, and then you can deduct that percentage of all the expenses of home ownership. That can include everything from utility bills to the costs of a home warranty like TotalProtect to cover the electrical systems, appliances, and HVAC systems of both your home and office. You can also deduct any expenses specific to the office space, so if you paint the office or have shelves built in you can deduct those expenses. This method also allows you to include home-related depreciation expenses, although those are best left to a tax professional to work out.
Understanding the Mileage Deduction
For most people in real estate, the biggest advantage of deducting their home office space is that it opens up the mileage deduction for trips that begin at home. The IRS assumes that everyone uses their car to travel from home to work, and considers that mileage personal. You have to claim a home office in order to claim mileage between your house and meetings with clients. Your home office allows you to claim business mileage every time you leave your house for business purposes. If you also maintain an office outside the home, you can also claim mileage for travel between the two offices. This deduction can be huge for an active real estate agent covering a large territory.
Remember, your home business deduction is simply a deduction for the space you use as your office, in lieu of deducting rent you might pay in an office building. You can also still deduct all your business costs like advertising, phone bills, office supplies, meals, travel, and education.