Understanding How to Utilize the Home Office Tax Deduction

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As a real estate agent, you most likely do not receive a W-2. You only get that 1099, with absolutely no tax deductions taken out throughout the year. That means that at tax time, things can get difficult if you’re trying to file your own taxes.

If you’re new to filing your taxes as a real estate agent with a 1099, you’re about to find out just how much those tax deductions are going to be your best friend, year after year.

There is one tax deduction that is often misunderstood: the home office tax deduction. Chances are, you work from home a lot. If you do, you probably have every right to take a home office tax deduction.

In order to claim this deduction, let’s first identify what makes an office an office, to make sure that you can claim your home office.

Setting Boundaries for the Office

Before claiming your home office, you need to understand that it has to be a separate space that is used only for work. If your computer is stuck in the corner of your guest room where family members crash, you can’t claim that guest room as an office.

This is not to say that you can’t have your desk in the corner of your bedroom, or to the side of your living room. As long as it’s an area that’s designated just for you, and just for your work, you can claim it. Simply measure the part of the room that you have designated for your office.

Calculating your Home Office Tax Deduction

You have two options to calculate your home office tax deduction, but you need to have those measurements handy for both.

For the simple method, each square foot you use for your office is worth $5, and you are able to claim up to 300 square feet. The maximum amount you can claim with the simple method is $1,500.

The complicated method is, well, more complicated. You’ll need to track all the costs of your home for the entire year (like maintenance, insurance, and utilities), plus depreciation (just normal wear and tear). Find out what percentage of your home is taken up by your office.

For instance, if your office is 300 sq ft, and your home is 1500 sq ft, that means your office is 20% of your home. You can deduct 20% of those home costs, which can really add up. You just really have to make sure you keep careful records.

Not Available for Remote Employees

The Tax Cuts and Jobs Act has unfortunately taken the home office tax deduction away from some people who have been able to use it in the past. It is no longer available for company employees who receive a W-2.

That means that if you work from home occasionally or full time, but are considered an employee, you can’t claim this deduction.  While this may not apply to a lot of real estate agents, there are some companies that hire agents as employees and pay them a salary.

So, just to reiterate: even if you work from home, if your brokerage gives you a standard W-2 at tax time, you are no longer allowed to claim the home office tax deduction.