Hey, everyone.
Welcome back again.
Today we're going to talk about
a really important deduction that you do not want to miss out on.
And this is the Home Office deduction.
This applies to anyone that is using the portion of their home
exclusively for a business that you're running.
So if you have a dedicated office that is in one bedroom,
that could potentially be a write off for you so you can convert
what would otherwise not be a deduction because it was a personal expense
on your personal home will now be deductible as a business expense.
In order to take this, you have to make sure that
that portion of your home is used exclusively for business.
It cannot be something where you're using
as entertainment also, say, your living room.
You couldn't watch TV in there,
hang out with the family and also work in there and deduct it.
It has to be a separate room.
That you're only using for a business.
And this is important if you're a real estate investor,
because outside of going to the various properties, looking for properties,
you probably need a dedicated office and you may not be at the point where
you need to spring for rent or purchasing a building.
You oftentimes are working out of your home for that type of business.
So you want to make sure that you're aware of this so you don't miss out.
There are two methods that are allowed for the home office deduction.
The first one we're going to talk about is your actual expenses.
So here what you're essentially doing is you're
figuring out how much square footage are you using in the home
for your business versus how much is the total space of the home.
So let's say you're using a room that is 300 square feet
where you have your computer and your files and everything,
and this is where you conduct the business.
And the total size of your house is 1200 square feet.
That means that 25% of your expenses
that are part of upkeep in the home will now be deductible on your business.
Without being limited like some of your other personal deductions would be.
There are six important deductions that you can take as part of your home
office expense if you're choosing the actual expense method.
Of course, with this method
you make sure that your record keeping is good in case you get audited.
You want to make sure that you have support for the deduction you're taking.
The first one is your mortgage interest or if you're renting the rent
on that space.
So if your mortgage interest was 4000 a year
and 25% of the space is used for business, that means
$1,000 of your mortgage interest will be deductible as a business expense.
The second one is your property taxes
probably pay property taxes every year on your home,
and so you want to be able to deduct those if possible.
Again, you may get those on schedule if you don't have a home office,
but you're much better off in the business world
pushing as many expenses you can as a business deduction
because there's oftentimes more benefits for taxpayers there.
So here, if you had 2000 in property taxes every year
and 25% of the home is used for business that's
another $500 that you could write off against your business income.
Our third potential deduction is repairs.
And here you have what could be considered direct or indirect repairs.
So maybe you're doing something specific to that room.
You could take that entire repair as a deduction
because it applies only to that specific portion of the home.
Now, if you're doing something else, like maybe you're having to do roof
repair, recoding the roof or something and really that benefits the entire house,
then you're only taking the percentage that applies to the business use portion.
So again, if we have 25% of our home used in the business,
then that means we'd get 25% of
whatever the cost of recoding the house was.
So let's say it was a $10,000 expense, that'd be 20 $500
that you could potentially write off now as a business expense.
So as you can see as we go down these, they start to add up
and they can be significant dollars that will reduce your tax liability.
Now our fourth one is insurance expense because again, you know,
it's very important to protect your property.
You want to make sure
you have the proper coverage or you're going to have insurance on the house.
And this is another item that really it's part of
not only your business
because you're operating
your business out of there, but also your personal residence.
And this is something that you wouldn't be able to deduct as a personal expense
on your schedule, a like your mortgage interest or property taxes.
So this is one where you're converting something
that is not deductible at all if it's not business use to something
that is now deductible as part of your business.
So if that if you spend another thousand dollars on insurance expense and 25%, it's
business, there's another two or $50 you can write off as a business expense.
Moving on to the utilities, you know, you have your water,
you have your gas, electricity, all those items that you use in your home,
potentially you have a telephone all of that.
So you want to make sure for a telephone
it's really better to have a separate, dedicated business line and you can deduct
all of it that's really the best way to handle that.
As far as the electricity, you know, obviously a portion of your electricity
is being used by the office for the lighting and the computers
and everything else that you're using in there.
And so you're able to take your business, use percentage of all of that also.
So say that adds up to 2000 with 25% business use.
There's another 500.
We keep adding up these deductions and trying to lower the tax liability
as much as possible because every dollar really counts here,
especially if you're already paying these and keeping track of them.
You know, you're not really adding any additional time other than just making
sure that you give this to your CPA so they can account for these deductions.
Our last deduction and this one, if you've watched the other videos
you know this is my favorite deduction because it's not a real expense.
You can take depreciation just like you would on an investment property.
It's just
that you're not taking the deduction on the entire value of the property here.
You're just taking it on the business portion of the property.
So you have to for residential property because it's your home
that's depreciated over 27 and a half years.
And that is another write off that you can take for your home.
Business.
So very important to keep track of all these receipts and everything.
If you're going to use the actual expense method.
The second method you can choose is the simplify method.
And this is really, you know,
like the name suggests, it's a lot easier than keeping
track of all these extra receipts, adding them up at the end of the year
and doing these additional calculations for everything.
The simplified method, the purpose is not only to make it easier,
but it really sort of estimates the costs that you may incur in the business
and you could even really, if you wanted to try and maximize
your deduction the most, you could compare the actual cost method,
take all of your costs, add them up, see what the deduction would be,
then take the simplified approach,
which we're going to go over in a second and see which one is greater.
So under the simplified method,
if you're taking $5 and you've maxed out your square footage,
so you're taking a deduction for 300 square feet,
that means you get a 1500 dollar deduction.
So again, if you're using more than 300 square feet
for your business use, say you're at 350 square feet,
well you don't get the benefit for that extra 50 above and beyond.
You get capped at 300.
So a lot of times you may be better off doing the actual expense method.
Other times maybe it's close.
It really just sort of depends.
The purpose of this
is really to streamline the deduction and make it easier for you.
So talk to your CPAs
see which methods better, make sure you qualify for this deduction
because you don't want to miss out on these free tax savings.
Thanks for watching.
Make sure to like subscribe and leave comments.
I look forward to seeing you in the next video.