Claiming the Home Office Deduction when you have a net loss for the year?

Question

Does anyone know if you have a net loss for the year, do you claim your home office deduction that year and carry it forward, or do you "not claim" it, hold on to the info, and claim it when you have a net profit for the year?

I do my own taxes.  This year we really expanded our rental business and I set up and used a home office; I have all the required documentation to claim the deduction... just confused about if I actually enter everything this year, or hold onto it and wait for a profitable year.

I have the book "Every Landlord's Tax Deduction Guide" and it says:
"If you have enough rental income to take a home office deduction this year, report the amount (up to the profit limit) on line 18 of your Schedule E. If you don't have enough rental income to take a home office deduction this year, write nothing in your Schedule E. Keep your record of your home office expenses to use in a future year when you have more rental income."

In another place in the book it says "Whether or not your business is making money, you should keep track of your home office expenses and claim the deduction on your tax return."

The two statements seem to be contradictory to me. Any insight? Thanks!

Rob Beland · Answer

You want to take all the deductions you can. After you calculate your income and your expenses, if you have a loss it simply offsets any other income you have outside of the rental income up to certain levels and depending on other factors. I have several properties and have never put the home office deduction on a Schedule E. I have a sole proprietorship set up for my RE business (I'm a licensed agent) and I funnel my home office deductions through there. It really doesn't matter I guess. If you don't have a SP set up you don't have a Schedule C which is where I put HO deductions. Line 18 is fine as long as you identify it as a home office deduction and you follow the rules in determining what qualifies as a home office deduction. That is an area where the IRS likes to focus for audits.

Account Closed · Answer

The home office expense carryover is from a prior year(s) and it occurs when the business associated with the home office has incurred a loss already OR the income shown is less than the home office deduction.  Put another way, the home office deduction cannot be used to "create" a loss, it can only be used to the extent their is a profit to put it against after all other expenses have been deducted.

So, as an example, if there was a Schedule C profit of $300 and the home office deduction totaled $900, $300 of the home office deduction would be used in the current year to bring the profit down to zero and the remaining $600 would be carried forward to use in the next year (on and on until they are used up).  As profits go up, this is less and less of an issue. If you use TurboTax year-after-year, any home office deduction carryover will automatically populate on Form 8829 and will be used to the extent allowed along with the current year deduction.

https://ttlc.intuit.com/questions/1979817-what-is-the-home-office-expense-carryover

Lisa Mason · Answer

Alright, thanks to both of you for your replies.

It seems like the tax guide I have may be wrong in that in suggests to report as "business use of home" on Line 18 of your Sch E.  Like you both said though, the home office deduction cannot be used to offset normal income, so that can't be right.

Is it standard practice then to have all my rentals on Schedule E, and then have my home office deduction on Schedule C?  Thanks!

Rob Beland · Answer

So @Lisa Mason I think what you are reading into is the fact that your home office deduction can not be used to offset "other income" meaning you should not put the office deduction on the Schedule E. In the eyes of the IRS, rental income is "passive income" and the home office deduction cannot be taken to reduce passive income. It can only be taken to reduce business income that was generated while in the home office. Essentially the IRS doesn't think that owning apartment houses requires a home office. Honestly at your level of investment (and mine and 90% of the people here on BP) the likelihood of being audited by the IRS is less than 1%. Take all the deductions you feel you are entitled to. If you are audited you will typically be required to justify 85% of them. The worst thing you can do is hide income. Don't do that. If you have a few expenses that turn out to be disallowed, not so bad. How much money are we talking about in terms of a deduction. As some people say, skip the home office deduction altogether. I take it every year and I max it out. My CPA will defend me in an audit. I put it on my Schedule C though. Maybe a big difference. I would say don't put in on your Schedule E.

Lisa Mason · Answer

Rob,

Thanks for the reply.  I realize that my net loss for my rentals will offset my other income, but the home office deduction cannot be claimed unless you have a net profit (I.e. it cannot offset "regular" income only business/rental income).

So I guess what I'm asking is, do I need to enter in my home office deduction now and have it carry forward, or do I just wait until I have a net profit in 2015 and then enter my 2014 home office deductions?

Claiming the Home Office Deduction when you have a net loss for the year?

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