Realty Times: Home Offices Gain Under Tax Rules

February 9, 1999

by Peter Miller

Home Offices Gain Under Tax Rules

Home is not only where the hearth is, but for growing numbers of people it's also where the office can be found. And now home offices have become more attractive as the result of new tax rules which have gone into effect this year.

For many years the myth was that having a home office was a sure way to invite an IRS audit. The myth was never true, but the old tax rules severely limited the ability to write-off home office costs.

To deduct a home office under the rules in effect until this year there was a "focal point" test: an area of the home had to be used "exclusively" and "regularly" for business purposes such as generating income and seeing clients. Also, there was the matter of money. There had to be an effort to generate a profit.

But what about the Virginia anesthesiologist, Nader E. Soliman, who worked with surgeons at several hospitals yet did the books and made appointments from a home office: Could he get a deduction even though he was not providing medical services or seeing patients at home? The government said "no." His place of work, it claimed, was actually the hospitals where he delivered services.

This question went to the Supreme Court -- which ruled for the IRS. But while the good doctor lost, the Soliman case set in motion new thinking about how home offices should be treated in an evolving business environment.

Under the Taxpayer Relief Act of 1997 passed by Congress, the requirements for a deductible home office have evolved, standards that take effect this year. Now the doctor can get his write-off -- and so will a lot of other people.

According to the IRS, you may be able to obtain a home office deduction if a portion of your house is used, "exclusively and regularly for administrative or management activities of your trade or business" and "you have no other fixed location where you conduct substantial administrative or management activities of your trade or business."

"You still must use the business part of your home both exclusively and regularly for your trade or business," under the new rules, says the IRS.

"If you are an employee, the business use of your home must be for the convenience of your employer. In addition, your deduction may be limited if your gross income from the business use of your home is less than your total business expenses."

What are substantial "administrative" and "managerial" tasks? The IRS gives these examples:

Billing customers, clients or patients.
Keeping books and records.
Ordering supplies.
Setting up appointments.
Forwarding orders or writing reports.

Amazingly enough, it gets better.
"Under the new rules," says the IRS, "the following activities will not disqualify your home office as your principal place of business."

You have others conduct your administrative or management activities at locations other than your home. (For example, another company does your billing from its place of business.)
You conduct administrative or management activities at places that are not fixed locations of your business, such as in a car or a hotel room.
You occasionally conduct minimal administrative or management activities at a fixed location outside your home.
You conduct substantial nonadministrative or nonmanagement business activities at a fixed location outside your home. (For example, you meet with or provide services to customers, clients, or patients at a fixed location of the business outside your home.)
You have suitable space to conduct administrative or management activities outside your home, but choose to use your home office for those activities instead.

Thanks to the questions raised by the Soliman case you may be able to obtain a home office deduction today with far greater ease than in the past. For specifics, speak with a tax professional to see how you fare under the new guidelines. In addition, see IRS Publication 587, Business Use of Your Home.
Question Of The Week
Q We came to this country in the 1980s but do not have a bank account. Instead, we keep our money within a community savings club. Will lenders allow us to use cash from this club as a down payment?
A Lenders understand that immigrant communities often maintain savings clubs similar to what you describe. These tradition entities and arrangements are well-known and accepted. Examples include "Hoi" (Vietnamese), "Isusus" (Nigerian and Ghanadian), and "Pasanaqu" (Bolivian).
Speak with lenders for details.
Weekly Resource

Freddie Mac has a consumer home inspection kit available online in English and Spanish.

With an award winning staff of writers providing up to the minute real estate news and advice, thousands of REALTORS^® in North America reporting daily market conditions, and a nationally broadcast television news program, Realty Times is the one-stop shop for real estate information. That's why over 10,000 real estate professionals have turned to us for their publicity needs.