It’s not uncommon for some full-time agents to drive upwards of 33,000 miles per year for business. That’s a lot of driving! It’s also a real estate agent’s most significant tax deduction! Correctly deducting $33,000 on an income tax return saves the average real estate agent over $6,000 every year! Having a qualified home office not only maximizes the auto deduction, it simplifies recordkeeping and calculating the deduction. It’s the reason we created our course, Auto and Home Office Deduction for Real Estate Agents. To learn more about the auto deduction, check out my article, Real Estate Agent, What Auto Use is Deductible. In this article, I’ll cover the basics of having a qualified home office and methods of deducting it.
The Qualified Home Office: For most taxpayers, the home office deduction is relatively small. The primary benefit of the home office is not so much the deduction for having one but what else it makes deductible – more of your auto use. Our auto and home office course covers this interaction extensively. It also comprises a significant portion of our Real Estate Agent: Comprehensive Tax Cut Library. To take the home office deduction on your tax return, the area used for business must meet the IRS definition of a qualified home office.
IRS Definition of a Qualified Home Office: Several criteria must be met to have a home office that is deductible according to IRS rules. The area must be regularly used for your business, exclusively for your business, and be your principal place of business. Here’s a brief overview of each requirement.
- The area used as a home office must be used regularly for business. It must be used consistently and continuously for business over the tax year. This, like many aspects of the tax code, is a somewhat grey requirement. There is no black and white definition of what constitutes regular business use. It is a definition we clarify in our course, Auto and Home Office Deduction for Real Estate Agents, to help you audit-proof your deduction.
- The area claimed as a home office must be used exclusively for business. This requirement is a hurdle that sinks many home office deductions upon audit. Exclusively means the area is ONLY used for business. Does the home office have kid’s toys in it? Does it include a computer or desk used for homework or family bill-paying? Does it have a couch with a pull-out bed the in-laws use a couple of times per year when they visit? If “yes,” the home office may not qualify.
The silver lining, however, is that if only part of a room is used regularly and exclusively for business, that area can qualify as a deductible home office. Making sure this area passes the exclusive use test is covered extensively in Auto and Home Office Deduction for Real Estate Agents.
- The final requirement of a qualified home office is that it must be your principal place of business. There are three ways to meet this requirement. 1) The office is used to meet with clients on a regular basis, 2) It is a separate structure ONLY used for business, or 3) The home office is used to conduct administrative duties for the business, and the owner has no other place to perform these duties.
Most real estate agents do not have an area in their home that is used regularly and exclusively to meet with clients. Even less have a separate structure that is devoted entirely to business. Most real estate agents, however, will meet the administrative duties requirement if they have no other location to perform these responsibilities. Administrative duties include a wide variety of activities such as scheduling appointments, conducting research, and keeping records. If the home office is used for this purpose, it will qualify as a principal place of business.
Deduction Methods: If you have a qualifying home office there are two methods you can use to deduct its cost: The Simplified Method and the Actual Cost Method.
Simplified Method: The simplified home office deduction method was created in 2013 as an alternative to the complicated and error-prone actual cost method (discussed below). The calculation is simple: $5.00 per square feet for up to 300 square feet of office space. There are, however, several drawbacks to the simplified method, disadvantages we cover extensively in our course.
Actual Cost Method: The actual cost method is calculated on Form 8829, Expenses for Business Use of Home. It is much more time-consuming and complicated than the simplified method. This complexity results in so many errors that self-prepared Forms 8829 are virtually guaranteed to generate tax, penalties, and interest when targeted by IRS auditors.
The actual cost method is so complex because it requires the allocation of direct and indirect costs related to the home office. Direct costs are expenses that only impact the home office. Indirect costs are household expenses shared with the home office (such as utilities, mortgage interest, and property tax). Indirect costs are deducted as a percentage of office square footage relative to the home as a whole. The actual cost method also requires depreciation of the office portion of the home and calculations to avoid double counting certain deductions on Form 8828 (Business Use of Home) and Schedule A.
The actual cost method, although time-consuming and complicated, may prove a more significant deduction for many real estate agents and business owners, especially those who rent or have large home offices relative to the size of their homes. If you utilize the actual cost method you’re going to need help properly calculating and maximizing the deduction and will benefit from our course, Auto and Home Office Deduction for Real Estate Agents.
Keep Learning: We hope this article has helped you understand the basics of the home office deduction and how it can save real estate agents hundreds of tax dollars, even thousands when utilized to maximize the auto deduction. If you are interested in cutting your most significant expense (TAXES!), we invite you to learn more about our course, Auto and Home Office Deduction for Real Estate Agents. If you really want to minimize the tax you pay our Comprehensive Tax Cut Real Estate Agent Library is for you. This searchable video library is the preeminent authority for real estate agents who are serious about cutting their tax due. It covers everything a real estate agent needs to know to maximize and substantiate every possible deduction real estate agents can take on their business tax return.