How Do You Deduct Home Office Expenses?

If you use part of your own home regularly and exclusively for your rental property business, you may be able to deduct a portion of the expenses related to your home, such as your interest on your mortgage, utility bills, and cleaning and repair costs.

In addition, the home office deduction would let you deduct all expenses that are solely and directly connected to your home office, such as painting the room and adding a carpet. Remember that office furniture is deductible whether or not you qualify for a home office deduction.

However, there is a major problem with this deduction. Unless you can really reserve space and equipment in your home for specific commercial purposes, it will be difficult to qualify for the deduction. If you can set aside at least a portion of your room for your own use, that might qualify for the deduction. Sadly, the deductions will be smaller due to the smaller size of your home office. If you use the office space to manage your landlord business and handle personal affairs, you would not meet the exclusivity usage test, where your office space must be devoted exclusively to your business.

If you sell your house, you will have to pay capital gains tax on the income earned from the area used as a home office within the last two years. Normally, without your home office, the capital gains tax exclusion of $500,000 for married couples filing joint returns and $250,000 for singles would protect a good portion of your profits. But if, for example, you claimed a fifth of your home as a home office, you would lose the benefit of that exclusion for a fifth of your sale profits, which would become fully taxable.