There are lots of great reasons to own a home. One of my favorites is the tax benefits. Many homeowners can write off the interest on their mortgage and on the amount they pay in property taxes. But if you have a home office, you may be able to take advantage of additional tax savings.
Before I go on, I must give my usual disclaimer: I am not an accountant. Before you make any decisions to improve your tax situation, discuss them with a tax professional. Each person’s financial picture is different, and what works for one may not work for another. And now, back to the subject at hand.
A home office provides several ways to reduce your tax burden, from business mileage to depreciation and more. Let’s start with mileage. The IRS considers the miles required to commute to and from work to be personal rather than business miles, so they are not eligible as a tax write-off. However, if you have a home office, the trip between your two offices changes from personal commuting miles to business miles. If you live ten miles away from your office and you work 48 weeks a year, that’s 4,800 reimbursable miles at a rate of $0.58/mile, or $2,784 per year.
When it comes to home expenses, your home office can save you additional money. Each home office represents a certain percentage of the overall home. Some people calculate that percentage based on square footage of the home office compared to square footage of the whole house. However, I’m pretty sure the tax code allows you to compare the square footage of the home office to the square footage of the whole house minus that of the kitchen and bathrooms (and maybe closets). This is significant. It can mean the difference of a couple percentage points, and those add up.
Let’s say your home office represents 10 percent of your home. This means 10 percent of the depreciation of your home can be written off—and this write-off is in addition to the new $10,000 cap on itemized deductions. Residential properties are divided into raw land and improvements (i.e., buildings and such). You can only claim depreciation on improvements. Let’s say your property is worth $500,000 and 80 percent of that is improvements, so the depreciable amount is $400,000. If depreciation occurs at 3 percent a year, that’s $12,000. If your office is 10 percent of that, you could earn $1,200 in tax write-off per year.
You also get to claim 10 percent of your utilities as a business expense, so if you pay an average of $400 per month in utilities (then you clearly do not have four children living with you like I do), your annual utility bill would be in the neighborhood of $4,800 per year. Multiply that times 10 percent and you get an additional $480 in annual tax deductions.
And don’t forget about maintenance. The new carpet, paint job or plumber’s bill will also be deductible at that same 10 percent rate. By the way, you don’t have to be a homeowner to take advantage of the tax savings on the mileage and utilities.
If you have questions about getting into real estate, please contact me at email@example.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery. Dick Selzer is a real estate broker who has been in the business for more than 40 years.