Can I deduct home office expenses for rentals reported on Schedule E?

[59station]

I don't have W2 or another job. I use a home office exclusively and spend all my time to manage these properties. I don't have an LLC or a company. Is there a place on Schedule E that I can deduct home office expenses? Thank you very much.

[DianeW777]

It depends, you can use home office for managing your rentals if you are not a business for self employment purposes.  Here are some tips for you to review that may help your decision.

• Schedule C - If you provide services, like a hotel or B&B would (cooking, cleaning services, maid service etc).
  • The term property manager also leads to  a self employment activity which could depend on the  number of properties and time you spend manage them.
• Schedule E - If you are just renting out a space and you do not offer any additional services.

It's possible the IRS could consider your rentals as investment property for the purpose of the home office expense. Unlike self employment, you would use a worksheet and not Form 8829 (exclusively for Schedule C).  You could prepare this form by hand as a worksheet and use it to calculate your deduction.

The IRS is quite clear on regular and exclusive use of the area. No personal business in the rental management office or on the computer in the office, no personal space used in the office for personal expenses, etc.  

If you decide you are using space that is strictly used for managing the properties the expense would be listed under Miscellaneous expense on Schedule E

• Publication 587
• About Publication 527, Residential Rental Property

[59station]

Diane, thank you so much for the reply. I rent these 20 properties as long term rentals, normally one year lease. So, no air bnb. But I do provide hired services such as repairs, cleaning, maintenance, and replacing tenants. 

Yes, I do use the home office exclusively and regularly for managing these properties. No personal business there.

So, I can report the water, electricity, gas expenses on Schedule E for this home office? Can you please tell me which line is the Miscellaneous line? Is that Line 19 Other? Should I put that under one property address? There is no place to put my own residence as home office. What about the property tax, mortgage interest, insurance, etc.? Also, depreciation for this home office? Or, because of the number of the properties, should I be considered as self-employed and report the home office on Schedule C? I don't have a company, though.

Thanks again.

[DianeW777]

Yes, it is line 19, Other.  Below you will see the instructions to enter it and you can simply label it as 'Home Office'.

1. Search (upper right) > Type rentals > Click the Jump to... link
2. Select Edit beside your property
3. Scroll to select Add expense or asset
4. Scroll to select the expense you need or Miscellaneous
5. Click the checkbox > Scroll to select Continue 
6. Scroll to the expense you selected and click the Start button to enter your description and expense.

The hired services are more like repairs for the rentals, so no feeding them, cleaning the linens or other 'short term' rental activities.  These should be on Schedule E as Residential Rental Properties.

The Home office, if listed as an asset for the rental property, becomes a bit confusing because an office (including a home office) must be depreciated over 39 years. It is considered as nonresidential property even though it's a part of your home.  The office section if not residential under the tax law.

 Here is what you need to know first.

1. First arrive at the business use percentage by dividing the office square feet by the entire home square fee. 
2. Next use that figure times the cost of the office when asked and use the date it was first placed in service for rental activity and management (assumes you used it before 2023)
   1. You must remove the land value before applying the percentage above (you can use the tax assessment from the county or city office to arrive at the land value portion)
3. Once you have this figure, use the chart below to arrive at the depreciation amount for 2023.  
4. Recommending again that you use the 8829 as your own worksheet.  
   1. Include this with your other expenses for the office using the same percentage for all expenses that are for the entire home. (real estate tax, mortgage interest, home owners insurance, utilities, etc)
   2. For any expenses that are directly related to the rental office such as paper, supplies used for the rental properties, etc

Here is how you calculate the depreciation for the home office.  

• Business use percentage of home cost without land x the rate in the chart below.  Only the first and last year have a special percentage for the month placed in service or removed from service.

[59station]

Wow, this is very detailed. I really appreciate it.

So should I use the TurboTax Premier or the Home and Business version?

[AnnetteB6]

Either Premier or Home and Business will handle Schedule E and rental properties well.  The Home and Business version will probably have a slightly more detailed interface as you are entering your information.  

@59station 

[59station]

Thank you, Annette. Because of the number of properties I have, if I am considered as self-employed, then probably I need to report it on Schedule C and must use the Home and Office version. Do I understand this correctly? Or is it better for me to report on Schedule E?

[AnnetteB6 · Accepted solution]

It is not a matter of the number of properties that you have, it is a matter of the services that you provide that determines whether you would use Schedule E or Schedule C.  

In one of your earlier posts you mentioned that the properties have long term leases of a year.  Even though you do provide maintenance and repairs and other services, that is not the level of service that would be needed to report the rental income and expenses on Schedule C instead of Schedule E.  In general, if the rental was more like a hotel or bed and breakfast where you provided daily maid or meal service for your renters, then it could be treated as a business reporting on Schedule C.   Long term rentals are reported on Schedule E.  

@59station 

[59station]

Thank you so much for your explanation. Now I understand it. All the best to you!