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How real estate can reduce your tax obligation: Home office deductions

homeoffice

By Jennifer Wagner, Tax Senior I

Do you ever work from home?

If your use of a home office is for your employer’s benefit and it’s the only use of the space, you generally can deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses. Further, you can take a deduction for the depreciation allocable to the portion of your home used for the office. Note that you will recover the cost when you sell your home, so you should be sure to keep track of any depreciation taken. You can also deduct direct expenses, such as a business-only phone line and office supplies.

Tax obligationFor employees, home office expenses are a miscellaneous itemized deduction, which means you’ll enjoy a tax benefit only if your home office expenses plus your other miscellaneous itemized expenses exceed 2 percent of your adjusted gross income (AGI). If, however, you’re self-employed, you can use the deduction to offset your self-employment income and the 2 percent of AGI floor won’t apply. In this case, your home office must be your principal place of business or used substantially and regularly to conduct business. The only-use-of-the-space rule also applies.

A new simplified option for claiming the deduction became available beginning in 2013. Under this option, you can deduct $5 per square foot, up to 300 square feet of home office space, for a maximum annual deduction of $1,500. If you choose this option, you can’t deduct depreciation for this portion of your home. But you can take itemized deductions for otherwise allowable mortgage interest and property taxes without allocating them between personal and business use. (See the Case Study “Safe harbor offers home office relief.”)

Of course, there are numerous exceptions and caveats. If this break might apply to you, discuss it with a tax advisor at LGT to understand your options in more detail.

Seek the services of a legal or tax adviser before implementing any ideas contained in this blog. To reach a financial advisor at Lane Gorman Trubitt PLLC, call (214) 871-7500 or email askus@lgt-cpa.com.