What Is the Home Office Deduction Limit?

How to Figure Out How Much You Can Deduct

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Home Office Deduction Limit. Tom Merton/Caiaimage/Getty Images

As a landlord or property investor, there is a strong chance that you have a home office. When paying taxes each year, you may be able to take a deduction for having this home office. Did you know that you may not be able to deduct of all your expenses for the year? Your income versus your expenses will determine if you are subject to a deduction limit for the year.*

Who Is Subject to a Home Office Deduction Limit?

Not everyone who takes the home office deduction is subject to a deduction limit on their taxes.

The amount you make compared to how much you spend will determine how much you are able to deduct.

  • Deducting All Home Office Expenses: 

Those whose gross business income is equal to or greater than their expenses are able to deduct all of their home office business expenses for the year.

  • Subject to Home Office Deduction Limit:

Those whose gross business income is less than their home office expenses will be limited in their ability to deduct certain expenses.

How Is the Home Office Deduction Limit Determined?

There is a step by step process to determine how much you are able to deduct on your taxes for your home office. The following six steps can help you determine this number.

1. You begin with the gross income from your business.

2. You then subtract expenses you would deduct even if you didn’t have a home office (mortgage interest, real estate taxes, and casualty and theft losses), but only the percentage for your home office.

For example, if you have determined that your home office takes up 10% of your home, then you can only deduct 10% of each expense.

3. Now you subtract expenses related to your business activity (second phone line, office supplies, depreciation on equipment). You can subtract 100% of these expenses.

4.

This will give you your deduction limit.

5. Once you have determined your deduction limit, you can then deduct your other applicable business expenses (maintenance, insurance, utilities and depreciation), deducting depreciation last. Again, you can only deduct the home office percentage of these expenses, such as 10% from our above example.

6. If your expenses are more than your deduction limit, you are able to carry over the remaining expenses to the next tax year. Keep in mind, anything you carry over will be subject to next year’s deduction limit.

An Example of the Deduction Limit

The following is an example of how to use your income and expenses to determine your home office deduction limit.

Your Gross Business Income is $10,000.
Your total home office expenses are $12,000.
You are therefore subject to a deduction limit because your expenses are more than your income.
 

Gross Business Income........................................................................$10,000
Minus
Home Expenses (Real estate taxes, etc.) 10%.......................................$6,000
Minus
Business Activity Expenses (Second phone line, etc.) 100%...................$2,000
Equals
Deduction Limit......................................................................................$2,000

Your deduction limit is $2000, but you have $4000 in home office expenses that you still want to deduct. You can therefore only deduct up to the $2000 deduction limit and will have to carry over $2000 ($4000-$2000) to the next tax year.

Deduction Limit.......................................................................................$2,000
Minus
Additional Home Office Business Expenses (Utilities, etc.) 10%................$1,800
Minus
Depreciation Allowed ($2200 allowable, but can only deduct $200 this tax year because of the deduction limit)..........................................................................................$200
Equals
.....................................................................................................................$0

Depreciation Carryover to the Following Tax Year ($2200-$200)................$2000

Landlord and Property Investor Tax Deductions

The home office deduction is only one way landlords and property investors can save money on their taxes. Depreciation, repairs and interest on a mortgage or the interest on business credit cards are other ways you can save.

*You should always consult the IRS or a certified accountant to decide what deductions are applicable to your specific situation.

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