Many individual taxpayers involved in real estate investment or development maintain a home office. But, even though the IRS recently made it easier to claim the home office deduction, you may still not qualify for it.
New safe harbor
The IRS now offers a safe harbor for claiming a tax deduction if you use a portion of your home for business. Previously, the only way to claim the deduction was to track all actual costs related to your use of the home space and complete Form 8829. This new, simplified option should reduce your paperwork and record-keeping burden.
The safe harbor allows you to claim a standard deduction of $5 per square foot for up to 300 square feet — a cap of $1,500 per year. Although you can’t depreciate the portion of your home that’s used as an office — as you can under the regular Form 8829 method — you can claim allowable mortgage interest, real estate taxes and casualty losses in full as itemized deductions on Schedule A, without needing to apportion them.
Two eligibility requirements
Regardless of which method you elect for a given tax year, you need to satisfy two requirements to qualify for the deduction:
1. Regular and exclusive use. You must use part of your home exclusively for conducting business. If you use an extra room both for your work as a developer and to lodge guests overnight, you can’t take the deduction.
2. Principal place of your business. This can be the stumbling block for those in the real estate industry, who often have an office outside of the home. You must show that you use your home as your principal business or, if you also conduct business at a location outside of the home, that you use the home space as a place to meet in person with clients or customers in the normal course of your business.
You can also claim the deduction for a separate freestanding structure, such as a garage, if you use it exclusively and regularly for your business — even if it’s not your principal place of business or the only place you meet clients.
Choosing the best course
Both the new safe harbor and regular method are subject to additional restrictions and rules, and they come with the potential for unexpected tax effects down the road. Consult with your tax advisor to chart the best course for you.