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Simplified home office deduction may not be the best option

Real Estate Tax Talk

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Many real estate pros qualify for the home office deduction. You qualify if:

  • your home office is your principal place of business;
  • you regularly and exclusively use your home office for administrative or management activities for your business and have no other fixed location where you perform such activities; or
  • you meet clients at home.

Even though they qualify for the home office deduction, many people don’t take it because they don’t think it’s worth the trouble.

One reason is that the deduction can be complex. You need to keep good records of your home expenses, allocate the expenses of operating your home between business and personal uses, and complete a special tax form, Form 8829.

In a rare move to simplify life for taxpayers, the IRS has created a new simplified, optional home office deduction. The simplified home office deduction starts this year and can be claimed on your 2013 tax return, which you file in 2014. You can’t claim the simplified deduction on your 2012 return, which you must file this year.

Using the optional method, you simply deduct $5 for every square foot of your home office. However, the deduction is capped at $1,500 per year; so it can be used only for offices up to 300 square feet.

Using the optional method relieves you from having to keep records of your home office expenses such as utilities, rent, mortgage payments, real estate taxes, or casualty losses. Nor do you have to complete Form 8829.

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Homeowners using the new option cannot claim a depreciation deduction for their home office. However, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.

Is it a good idea to use the new simplified home office deduction? Only if the deduction you could obtain using the regular method isn’t much more than $1,500.

Most people with home offices, particularly those who rent their homes, can qualify for a home office deduction much larger than $1,500. For example, a person with a 100-square-foot home office in a 1,000-square-foot apartment who pays $1,000 per month in rent and utilities would qualify for a $500 deduction using the optional deduction (100 sq. ft. x $5 = $500), and a $1,200 deduction using the regular method (10% x $12,000 = $1,200).

The inability to deduct depreciation doesn’t make the optional method so great for homeowners either.

If you’re thinking about using the optional method, you should figure your deduction using both methods and use the method that gives you the largest deduction.

The regular method does require more record keeping than the optimal record, but you probably keep these type of records anyway.

Doing the required calculations and filling out the form can be challenging, but will be much easier if you use tax preparation software.

Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.

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