Contributed by: JoshuaC, FreeTaxUSA Agent, Tax Pro
If you have income from rental properties, you may spend a lot of time and effort managing them. If you perform these necessary tasks from a dedicated space in your home, and the space meets certain IRS requirements, you may be able to deduct expenses related to your home office.
This deduction can reduce your rental income and may lower your tax bill for the year.
This article will explain when the deduction is allowed, how to calculate it, and where to report it in the FreeTaxUSA software.
Ensure the expenses are deductible
Generally, you can claim a home office deduction only if the office space meets these requirements:
- The space is used regularly and exclusively for the rental(s), which means the home office space doesn’t serve any personal or other professional purpose – it’s used only for managing the rental(s).
- The space must be the primary place rental-related administrative tasks are done. Put simply, you don’t have another location, such as an office, where you spend more time doing the same rental-related work.
In addition, to qualify for the home office deduction, you, as the landlord, must be actively and regularly involved in managing the rental income.
💡 Note: It’s important to know whether you should report the income as rental income or business income. If you’re simply providing housing, you can generally report it as rental income using Schedule E. But if you provide additional services, such as housekeeping or meals, and/or you spend the majority of your time working with the rentals, then you may need to file it as business income on Schedule C instead.
This article focuses on the rental income scenario. For more guidance on this distinction, see this FreeTaxUSA Community article.
Calculate your deduction
Once you’ve determined you can use the home office deduction, you’ll need to determine what expenses can be included. There are two basic categories for these expenses: direct and indirect.
Direct expenses are costs paid specifically for the office space. They may include repairs, improvements, special utilities, supplies, or other costs that apply only to the home office and not to the home as a whole. The full amount of such expenses can generally be deducted.
Indirect expenses are costs for the entire home, which also benefits the office space. Examples include general utilities, home insurance, mortgage interest, or overall home improvements which include the office area.
To calculate the deductible amount of indirect expenses, you’ll need to figure out what percentage of your home is used as your home office. This is typically done by either dividing the square footage of your office space by the total square footage of your home. If all your rooms are of a similar size, you may instead divide the office room by the total number of rooms in the home.
Once you have a percentage figured, you can apply it to your indirect expenses to determine the deductible amount. For example, if your home office space is 10% of your total home area and you paid $2,400 in mortgage interest, then you can use $2,400 x .10 = $240 as the deductible amount.
Enter your expenses
Once all your qualifying expenses are accounted for, add the totals to your tax return.
In the FreeTaxUSA software, enter your expenses by following this menu path: Income > Business/Rental Income > Rental Income (Schedule E). Select Add a Rental to create a new record if needed. If you’ve already entered information for the rental, select Edit next to the existing record.
From there, when you come to the Your Rental screen, look for Expenses in the menu and click Add or Edit/Add next to it.
On the next screen, you’ll see a list of expense categories.
None of the listed options are specifically for home office deductions, so you may need to enter your home office costs under Miscellaneous Expenses farther down on the screen.
Give each miscellaneous expense a clear description so you can recognize it later and explain it if needed.
Things to remember
Always keep records detailing how you determined your home office percentage and how you made other necessary calculations. It's also important to keep receipts, bank statements, or other records documenting each expense. The IRS may request documentation to support your deduction.
If you have additional questions or need further information about this or another topic related to your income tax return, FreeTaxUSA Customer Support is ready to help. Sign in to your account and go to the Support Center to send a message.
Additional Resources:
IRS Topic no. 509 – Business use of home