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Leslie Daff, JD, MBA - Orange County Estate Planning Lawyer

Friday, January 13, 2012

Tax & Estate Planning Tip #5: Yes, You Can Deduct Your Home Office

Many people do not claim home office expense deductions, fearing that doing so may trigger an IRS audit.  While such audits received much press in the 1990s, today with more people than ever working from home, the rules are more taxpayer- friendly.  Don’t fear taking a legitimate home office deduction. 

Essentially, you can claim a home office deduction for a room or a separately identifiable space, such as portion of a room or a storage area in your garage, that you use regularly and exclusively for business.  Business is defined broadly.  Using the space to manage your rental properties is a business use, but tracking your stock investments is not.  The location has to be the main office for any business (primary or secondary) you run.  Even if you work as an employee outside of the home, you may be able to claim a home office if you meet clients at your home or if your employer does not provide you with an office and you need a place to work.   

How much can you save?  Assume you own a 1,600 square-foot home with a purchase price of $1,000,000 ($800,000 home, $200,000 lot).  Your home-related expenses are $60,000 (real estate taxes $10,000; interest expense $40,000; insurance $2,000; maintenance $3,000; and utilities $5,000).  You use 160 square feet (10% of the home) to run your consulting business.  You can claim a home office deduction of $8,050 ($6,000 (10% of $60,000) plus depreciation of $2,050 ($800,000/39 years x 10%)).   Because this deduction offsets self-employment tax as well as federal and state income taxes, you will probably reduce your taxes by 50% ($4,025) or more. 

When you sell your home, you will have to report the depreciation you claimed as income, but you do not have to report the business-use portion of the gain (10% in our example) as income and you can still use the $250,000/$500,000 exclusion on the entire gain.   

One of the main benefits of claiming a home office deduction is the business mileage rules apply as soon as you leave your driveway.  If you drive 10,000 business miles at 55 cents per mile, that’s an additional $5,500 deduction ($2,250 tax savings) for the year


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