Apartments used for business can also qualify for IRS deductions, but make sure you know the rules and exceptions.
Some perks of working from your Los Angeles, CA, rental: Write emails with soft music playing in the background, set your air conditioning to whatever is comfortable, stay snug in your favorite sweats, and enjoy an easy commute from your bedroom to the home office. But one thing that renters who work-from-home often miss out on (besides water cooler chitchat) is deducting taxes on home office space.
The savvy renter knows this perk is not just a tax break for homeowners. Renters may be able to claim the home-office deduction on their federal income taxes in the same way homeowners qualify for tax breaks on home offices. Of course, when it comes to taxes, nothing is simple. Rules and exceptions still apply. Not sure if you qualify for tax breaks as a work-from-home renter? We’ve answered some of the most common questions below.
Frequently Asked Questions About Home-Office Deductions for Renters
- I do most of my work from my apartment. Does that count?
- What else do you need to qualify for a home-office deduction?
- What if I’m not self-employed?
- How do I calculate the percentage of my home used for business?
- What expenses qualify for the home-office deduction?
- How do I calculate my total home-office deduction?
- What if I’m terrible at math?
- Nothing easy is ever free (including tax refunds)
To qualify for the deduction, you must use your home as your principal place of business. That doesn’t mean you can only conduct business in dedicated office space; it simply means that you must use your home “substantially and regularly” for business, according to the IRS. That sounds subjective — and it is. Generally, if you meet clients at your home office as part of your normal course of business, you satisfy the rule. That’s true even if you occasionally work at another location, like a co-working space or your local Starbucks.
Your workplace must be used exclusively for conducting business. That means you can’t use it for any other purpose, but you can still work in other areas of your home. However, parking your laptop on the kitchen table doesn’t transform the kitchen into your office. Ditto if you meet clients in your living room (no matter how grown-up your new sofa and rugs make the space look). The space must be clearly exclusive, but it doesn’t have to be completely separate from your other living space (you don’t, for example, have to claim an entire room as your home office — a desk in a sectioned-off part of a room may be sufficient).
Most people assume that you have to be self-employed to take a home-office deduction, but that’s not true: The deduction is also available to employees who work from home. However, in addition to the exclusivity requirement, your workspace must be for the convenience of your employer and not because it’s simply easy for you. You have to pay all of your own expenses as well: To claim the deduction, you cannot perform services in a space for which your employer pays the rent.
It’s simple math. First, determine the square footage of your entire home. Next, measure the room or part of a room that qualifies as your business space. Divide the space used for business by the total square footage of your home. The resulting percentage is what you’ll use to prorate your expenses. Here’s a quick example: Suppose your apartment is 1,000 square feet and the space you use for business is 200 square feet. You’ll figure your deductions by prorating expenses by 20%, or 200/1,000.
To figure the home-office qualifying expenses for homeowners may deduct from mortgage interest and real estate taxes. But that doesn’t mean that renters are stuck: Payments to your landlord count. Qualifying expenses also include items like home maintenance, including renters’ insurance, electricity, security systems, heating and cooling systems, and the like. It may also include internet and a secondary phone. It’s important to note that the IRS does not allow a deduction for a primary phone in your home even if you use it only for business (the IRS considers it a personal expense nonetheless).
Multiply the percentage of your home used for business by your total expenses. The resulting figure is your deduction. Using our earlier example, let’s assume your total expenses are $8,000. Your deduction, reportable on Form 8829, is $1,600 (or the 20% you figured as your prorated value multiple).
If you’re looking for something a little easier, the IRS now offers a simplified option for calculating the home-office deduction. Multiply the square footage of the portion of your space used for business by the prescribed rate. The current applicable rate is $5 per square foot up to a maximum of 300 square feet. Again using the same example, if you use 200 square feet of your home for business, the deduction is $1,000, or 200 square feet x $5/square foot. In the example above, the deduction calculated under the simplified method is $600 less than the traditional method. That’s not all that unusual, depending on the individual circumstances, but don’t let the numbers fool you. If record keeping isn’t your strong suit, the simplified method is most likely best for you.
No matter which option you choose, remember that the IRS requires and expects you to keep excellent records to substantiate your expenses.
Have you been successful with a home-office deduction as a renter? Tell us your experiences in the comments below!