home business deduction to manage rentals

[FrontRanger]

We are closing on a rental and hope to add 2 more by year end. My wife stays at home and will be managing the properties. Does anyone else claim the home business deduction for managing their properties out of their primary residence? We would have dedicated office space in one of our finished rooms in the basement? The goal is to have 4to 5 properties within several years.

[zinethstache]

We own 2 businesses (part time) as well as have multiple rentals and as of yet we've not felt compelled to do so because I don't want to limit a space for those activities. I am not even sure exactly how I would slice that up having so many activities going on. I imagine if you really don't mind quarantining a space for 100% dedicated rental only use that would be fine. I don't see us having to do much in the way of books with the rentals as we update them once a month when our PM statement is sent to us. Now perhaps that is old school, I would be curious what others think. I will be using a tax accountant for the first time ever because of the rentals. I want to ensure we do the books correctly and I plan to ask about that as I do have a dedicated Studio/Den by the front entrance that would be perfect to use as a deduction. Being that I have a laptop, I can work on my books in any room of the house.

[Nords]

We are closing on a rental and hope to add 2 more by year end. My wife stays at home and will be managing the properties. Does anyone else claim the home business deduction for managing their properties out of their primary residence? We would have dedicated office space in one of our finished rooms in the basement? The goal is to have 4to 5 properties within several years.

Years ago I asked a CPA about claiming a rental property as a business, and was told that it takes more than one property.  (I don't have an IRS pub or tax code reference for this, just the word of a guy who's been dealing with the tax court.)  So you'd probably want to make sure that your two (or more) properties actually take up enough of your time to claim them as a rental real estate business before you take a home-office deduction.

It would seem that claiming a home office deduction on top of a bunch of rental properties would be waving all sorts of red flags in front of the IRS audit computer.  You'd feel compelled to keep excruciatingly detailed records, and because it might take them 20 years to get around to an audit it would mean that you'd spend every year making your records ever more detailed yet auditable.  If the tax code gave you two choices for maintaining documentation, you might feel compelled to use the more time-consuming method just to demonstrate the higher standard.  In other words, it sounds like a lot more hassle than the savings is worth. 

It might be a better use of your time to keep a detailed vehicle log (instead of the easier methods) or to write off a cell phone or other mobile computing devices that allow you to manage the property while you're out & about.  I spend far more time managing a rental property from outside of my home than inside of it, and that's just one property.

[Hamster]

Everyone I have talked to says that claiming a small home-office isn't worth the increased audit risk, but I don't know if that's just urban myth or reality. At any rate, you should at least read http://www.irs.gov/publications/p587/index.html and maybe some general books on landlording that deal with tax implications, or some books that deal specifically with tax implications of home businesses.

Regardless of whether you have a home office, you can deduct a percentage of office equipment- printers, computers, etc if you use them for business use, but only the percent that they are used for business purposes. Sometimes calculating out depreciation, tracking everything, etc is more hassle than its worth if your business usage is only a small fraction of total usage. You can also keep supplies separate - paper, etc, that are exclusively for business use and deduct those. If you have 2 or 3 rentals, though, trying to deduct things like a personal cell phone gets to be a big stretch - you'll maybe use it 1-2% for business, >95% non-business, unless your tenants are really high maintenance.

[FrontRanger]

The IRS is very focused on making sure you use the office space on a 'regular' basis. That definition isn't clearly defined. On average, how many hours a month would one typically spend managing one property? Problem I also see is a lot of the management activities would be outside the home.

[Undecided]

It would seem that claiming a home office deduction on top of a bunch of rental properties would be waving all sorts of red flags in front of the IRS audit computer.  You'd feel compelled to keep excruciatingly detailed records, and because it might take them 20 years to get around to an audit it would mean that you'd spend every year making your records ever more detailed yet auditable. 

Absent fraud or 25% underreporting, the IRS normally only has three years from when a return is filed to audit it.

But if you own your home, the home office deduction does entail essentially depreciating the portion of your home used for the office, so may be a lot less worthwhile than it may at first seem (and less worthwhile than taking the deduction if you rent your home). 

[Nords]

Absent fraud or 25% underreporting, the IRS normally only has three years from when a return is filed to audit it.

Yes, but every year the IRS has an opportunity to audit at least three years of your returns.  You don't know what year that's actually going to happen (if ever), so you end up spending 20 years maintaining an excruciatingly thorough system of records.  And every year you'd add at least one more "good idea" to your system, to make it even more complex and labor-intense.

You're correct that you only have 3-7 years of records.  But you may have wasted 20 years of your life making them the world's best sequence of 3-7 years of records.

This thought is driven home to me as I contemplate my Dad's file of tax returns & documentation, which he's lovingly maintained since 1958.  I'm probably going to end up holding on to it until he's passed on.  Or after his probate is finished.  Or 3-7 years after that.

[Undecided]

Absent fraud or 25% underreporting, the IRS normally only has three years from when a return is filed to audit it.

Yes, but every year the IRS has an opportunity to audit at least three years of your returns.  You don't know what year that's actually going to happen (if ever), so you end up spending 20 years maintaining an excruciatingly thorough system of records.  And every year you'd add at least one more "good idea" to your system, to make it even more complex and labor-intense.

Hah! I guess I'm lucky that I don't suffer from that compulsion. I'm comfortable with my reasonably accurate and complete (and not overwhelmingly burdensome) records, but they haven't been tested yet (knock wood).