Rent, Interest, and Taxes
The
following discussion applies to the home office deduction if you are
using the regular method to determine the amount of expenses you may
deduct for business use of a home. However, the simplified
method is also available if you prefer not to calculate an allocation
of these and other expenses.
Renters. For
those who rent their home, the major advantage of the home office
deduction is that a portion of your rental payments will be deductible.
Renters who don't qualify for the home
office deduction ordinarily can't deduct any of their rental payments,
so working out of your home can result in significant tax savings.
Homeowners.
For homeowners, your deduction is not based on the fair rental value
of the home. Instead, you may deduct a pro rata portion of your real
estate taxes and your qualified mortgage interest (but not principal)
payments on the home. You can also claim a depreciation
deduction to recover some of the home's purchase price.
"Real
estate taxes" include the amount of taxes actually paid to the taxing
authority on your behalf during the year, which may be different from
the amount that your mortgage holder requires you to pay into an escrow
account. Real estate taxes do not include amounts paid to any homeowner's
association or condominium association. They also don't include assessments
for local benefits like streets, sidewalks, or water and sewer systems
-- instead, these amounts may be depreciated.
"Qualified
mortgage interest" may include interest on a second mortgage, or a
home equity loan. However, there are dollar limits that apply. Only
interest on mortgages up to $1,000,000 used to buy, build, or improve
your property, and interest on home equity loans up to $100,000, is
considered "qualified." If you think either of these limits might
apply to you, consult your tax advisor or get IRS Publication 936, Home
Mortgage Interest Deduction, for more detailed information on
computing your deduction.
For both renters and homeowners,
the deductible portion of the rental, tax, or interest payments depends
on the percentage of the home's space that
is used for business. If you start or stop using the office during
the year, the percentage of time that
the office is used will also be a factor.
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Save Money Of course, homeowners would be able
to deduct all of their real estate taxes and qualified mortgage interest
as itemized deductions, regardless of whether they use their home
for business purposes. Claiming these expenses as part of the home
office deduction basically means shifting them to a different tax
form (Form 8829). One major advantage to this is that by claiming
these amounts as a business deduction, you reduce the net income on
which you must pay self-employment taxes. Furthermore,
claiming the home office deduction means that some of your real estate
taxes and mortgage interest will be used to reduce your adjusted gross
income (AGI), which in turn can improve your eligibility for numerous
tax benefits including IRAs, miscellaneous itemized deductions, and the
deduction for medical expenses that exceed 10% of AGI (7.5% if the
taxpayer or spouse is over age 65). |
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