In this video i'm going to be discussing the home office deduction
is it a red flag for an audit do you qualify for it what are the different
methods out there that you can utilize and about how much of a deduction can
you expect to take from it so for those of you who
don't know who i am my name is Navi Maraj
i'm a certified public accountant and i specifically help real estate
professionals that's the real estate agent realtor or broker
save thousands of dollars in taxes but this video also applies to you i guess
you know regular business owners as well if you watched my last video
on the importance of tax planning home office was one of the
first items i spoke about under the maximizing deduction sections
if you missed that video i'll try to link it up or if you're watching this on
youtube then it'll be in the description below so
let's just jump right into it is the home office deduction a red flag
for an audit and the answer to that is just simply no
that's a super old mentality if you think about it how many
people in this day and age operate a business
out of their home in in you know 2020 versus let's just say 1990 which is you
know that's where some of that old school mentality has has has stuck
in the system this whole time you know the
circumstances and the technology has all changed since uh then um so
what do you have to do to meet you know what guidelines you have to meet
um to qualify for the home office deduction so let's chat about those for
a second the first qualifier is might sound very
obvious but do you actually have a trade or business
that you do right so some examples of that would be do you
own investment real estate property where
you have a tenant and you're the landlord that could qualify you
as having a trade or business are you like all of my clients a real estate
professional like your realtor broker or real estate agent or maybe
you're another business owner if you sell goods
on amazon or you're a dentist or something like that
the second qualifier is do you use the area regularly and exclusively
for business so those terms like regularly and exclusively let's
touch on those for a moment so regularly means
not incidentally or not occasionally it basically means that consistently you
use a portion of your home for small
business so let's call it a few hours per week or
you know monday wednesday friday of each week or it's consistently used for a
business purpose not seldomly used exclusively
means that that same area that you use for home office
is not used for another purpose when not in use for business so an example that
comes to mind is like you can't use your kitchen table for
home office and then you know put your laptop away and then
that same kitchen table is used to you know have dinner that would be an
area where it has mixed use and it needs to be exclusive
for business the third qualifier is is it your principal place of
business and the definition of this has changed over the years
um so i want to say that it's okay to have
multiple locations where you conduct business
and often my clients have office space in their brokerage office
they obviously are showing homes and different properties
but they do have their administrative and management activities
at the home office and that can be you know shift things to make that your
principal place of business so for again for the realtors out there
writing up a listing your market analysis
making cold calls uh talking to people like myself about tax planning
all those things qualify as uh of as you know administrative or management type
activities that you're doing at home in your home office
so if you know who can't use the home office for
a deduction it's someone who obviously is you know not a business owner doesn't
has a trade or business but also someone who
doesn't pay rent or doesn't own a home and have expenses associated with that
because there's you know no expense that you incurred so
therefore you wouldn't get a write-off for it
so let's talk about the methods right i'm going to back up a second
and on the slide here i have you know there are two methods
simplified the simplified method and the regular method
the simplified method is pretty simple it's
works like this you get five dollars a square foot
up to 300 square foot foot that you use for your business okay
so you know most of my clients um you know the max situation would be
you know fifteen hundred dollars right you use up to three hundred square foot
is the max that they'll allow you to go using the simplified
method and five dollars times 300 square foot is 1500
max you know i find that a lot of my clients go
above what i'm about to say but on average um 100 square foot you know like
a 10 by 10 room is probably what's really
being used so the simplified method in that example uh
would only get you a 500 deduction right um but let's talk about
the regular method the regular method allows you to take
the business portion of your home and write off a bunch of different items
some of them i couldn't even fit on the board here
so in the let's use that same example so you have a 100 square foot
like a 10 by 10 area and let's just say your total square foot is a thousand i
know that's kind of on the on the low end but
um that would mean that ten percent of your mortgage interest your mortgage
insurance your rent if you if you're a renter your
renters insurance homeowners insurance hoa
or condo dues your real estate property taxes
utilities such as like electricity and water
a security system and even an accounting word called depreciation so
the regular method in my experience is at least
you know three times the deduction that you get on the
uh if you use the simplified method and sometimes this is thousands of dollars
more if you use this method versus the simplified method so
quick note i mentioned depreciation a moment ago it's not an accounting term
there is something called depreciation recapture
don't let that scare you okay what it really means is if you
sell your home the ir so first off it doesn't even apply if you rent but if
you own your home and you sell that home the irs says you
got to take all the depreciation expense that you've
expensed over the years and pay that back when you sell the home
you don't have to pay all of it back you take the amount that you depreciated
and you multiply that by 25 and that's the amount
that you'd have to pay tax on um before you freak out about it
you know don't worry about it you're getting a tax break now
of i would say at least 15 percent if not 40 percent
and then using that money as you wish pretty much for free
until you sell your home and that's even if you do sell your home
so um it rarely harms you i'm just bringing it up because
i see a lot of videos not really talking about this in the home office deduction
so i just want you to be aware of it that
if you take the regular method this does not apply to the simplified
method if you take the regular method then depreciation expense is allowable
and know that when you go to sell your home
that depreciation recapture will exist right um so i guess my
question is to you if your accountant isn't talking to you
about the regular method or even the simplified method for that
matter you've got to ask yourself why you know is it because it's more
work on their end i mean yeah it does cause us accountants to do
a little bit more work sometimes a little bit more bookkeeping
throughout the year um but if the answer to that is yes you
know what else aren't they telling you about i mean this is one of the most
simple tax deductions and if they're not
teaching you how to maximize this strategy
then they're certainly not teaching you about
any of the other strategies right so um you know the purpose of
all my videos really is just i want to make you aware of these things these
different deductions that you can take it's they're not designed to um show you
the itty bitty you know detailed information of how to actually
implement the strategy i would ask you to either consult with myself
or your tax professional on how to exactly implement the strategy
um specifically what i mean by that is if like if you're
taxed as an s corporation so you're an llc tax as an s corp or maybe a c
corporation taxes and s corp the way you implement the strategy and actually get
the deductions a little bit different than
if you were taxed as a sole proprietor so with that said
if you got value out of this video please do subscribe because in the next
video i plan to discuss the auto deduction and
these two items sort of tied and get together you're going to see how
establishing an administrative home office plays a
role in the auto deduction and so sometimes i
want to make sure that my clients even if they really don't use
want to use a regular method for some reason that they're at least doing
simplified because it plays a role in the auto deduction
so i just want to say thanks for all the great feedback i really appreciate all
the comments that you all have been leaving
like i said do subscribe and i'll see you in the next video