As many of us become more accustomed to working from home, it is easy to forget that some industries were regularly working remotely prior to the COVID-19 pandemic. It might be easy to forget altogether that real estate businesses also qualify for the same deductions as other businesses. Yet, it is often easy to overlook something like a home office for a real estate rental operation, but the home office typically functions as the glue holding these businesses together.
How to Qualify
The first step to taking advantage of this deduction is to be a trade or business. While it sounds overly straightforward, it became apparent with the advent of the Section 199A Qualified Business Income (QBI) deduction that this may not be so clear-cut. Many taxpayers and professionals alike were surprised to learn of the reams of material written on the definition of a “trade or business” in Section 162(a). The simplest definition of what qualifies an activity as a trade or business is that you must be involved in the activity with “continuity and regularity”.
What to Deduct
Having a home office for rentals can be the key to unlocking many tax advantages that were previously out of reach. If you’re like most people, travel costs related to commuting are not deductible because these miles are a personal expense. If you’re a rental owner without a home office, the first and last trip of the day is a commute.
Like all business mileage, trips between business locations (such as from a rental property to a hardware store) would be deductible. However, once your residence becomes the “principal place of business”, then the initial and final trips are no longer a commute and are fully deductible. This can be a great way to add up your deductions.
You can benefit even more if your rentals are not near your home. In the Trzeciak court case, a property owner lived roughly 80 miles from 13 of her 14 rental properties. This case hinged on just the deductibility of the mileage, but whether or not the time spent driving from her home to a rental property counted toward the 750 minimum hour requirement to be a real estate professional. The court eventually determined that the property owner did have a sufficient home office and could deduct the loss.
By virtue of being reported on a different schedule, it can be easy to forget that a real estate rental activity can also qualify for an office in the home. Meeting the definition of a trade or business is critical to using the home office deduction. Once the taxpayer achieves that threshold, other benefits such as additional business mileage or additional real estate professional hours also become available.
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