When the pandemic hit, many people were forced to work from home. Now, a significant number of those folks are choosing to work from home indefinitely, either full-time or part-time. If you are a self-employed homeowner and working from home, it’s time to make your home work for you. It’s time to create a dedicated home office, so you can reap the tax benefits of working from home.
To write off the expenses associated with a home office, you must have a space that is used exclusively for work; it cannot be used for any other purpose. You cannot claim your dining room just because you usually work from the dining room table. You cannot claim your child’s bedroom if your child continues to sleep there at night. This is part of why we’re seeing an uptick in the real estate market: people are looking for floor plans conducive to having dedicated home offices. Open-concept homes are wonderful for gatherings, but not so good if you need to prove to the IRS that you have a legitimate work space.
Let’s assume you’ve identified an appropriate home office space. Maybe you’re an empty nester and your child no longer comes home for the summers, so his bedroom can be converted into an office, or maybe it’s time to admit that your family will always eat all three meals in the breakfast nook or at the kitchen bar, so the dining room is up for grabs. Your first step is to measure the office space and then to choose one of the methods the IRS allows for determining the percentage of the house that represents.
Let’s say you are converting your den into an office. The den is 250 square feet and your home is 2,000 square feet, so the den represents 12.5 percent. This is probably the easiest way to measure. You can write off 12.5 percent of certain expenses on your tax return. But before we move on, if you’re willing to put in a little more time on this, you can use a different calculation. The IRS allows you to subtract areas that would be unusable as office space, areas like hallways, stairs, closets, and bathrooms. With this calculation, your denominator becomes 1,600 square feet and the den is actually 15.6 percent of the available space. The final way the IRS allows you to calculate the percentage represented by your home office is to count the number of available rooms (not counting bathrooms) and divide the den (one room) by the number of rooms in the house. Let’s say you have three bedrooms, a kitchen, dining room, living room and den. That’s seven rooms, so the den is a seventh of the overall space, or 14. 3 percent.
Depending on your home’s configuration, you can determine which calculation is most advantageous. Once you’ve done so, it’s time to calculate your allowable deductions so you can discuss them with your tax accountant. To be clear, I am not an accountant and am in no way giving tax advice here. I’m introducing you to a topic you may want to discuss with your accountant.
Okay, here are some of the expenses the IRS allows you to write off because of a home office: mortgage interest, homeowners insurance, property tax, utilities, depreciation, and home repairs. If you bought a primary residence last year for $500,000 and your home office is 15.6 percent of that house, here’s how those deductions might pencil out. The expenses above total about $40,000 per year, making your 15.6 percent write-off about $6,200.
But the tax advantages don’t stop there. If you have an office outside your home, the commuter miles back and forth to your office that are not typically tax-deductible become tax-deductible trips between your home office and remote office. If your annual miles between offices are about 1,500 and you multiply that by 57.5 cents per mile, you’ve got another $2,750 in deductions. That’s about $9,000 in deductions.
If you have questions about property management or real estate, please contact me at email@example.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 45 years.