Property Taxes: a Home Office Expense that You Can Deduct from Your Taxes
Post #33: Freelancers, solopreneurs, and entrepreneurs - if you work from home, you may be able to deduct this home office expense to save on your tax bill.
In this Substack, I will walk you through the process of starting, operating, maintaining, and — if needed — selling or closing your own small business.
Today, I’m going to cover residential property taxes as a part of your home office deductions to reduce your tax bill as a freelancer or registered small business owner.
Note: This article will be shorter than the others in this series on home office deductions because much of what you need to know is covered in previous articles, which I have linked below for easy reference. Or start here…
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ICYMI
About Home Office Deductions
In case you were wondering what I captured in previous articles, here is a quick reference (to cover all of your bases):
How can I determine whether I am eligible for Home Office Deductions?
What other Home Office Expenses can I deduct as part of my home-based business?
Is there more information on how to calculate the Business Percentage of Use?
What is the difference between Depreciation expenses and Home Repair and Maintenance expenses?
What if I choose to use the Simplified Method for calculating Home Office Deductions?
Why Residential Property Taxes May Be Deductible
The Internal Revenue Service (IRS) permits self-employed individuals who own their home to deduct expenses related to the business use of their home.
This includes a portion of residential property taxes because a home office may serve as one of many legitimate business expenses.
By allocating a part of your home exclusively and regularly for business purposes, you can reduce your taxable income, thereby lowering your overall tax liability.
💡 Tip: learn more about this eligibility to deduct home office expenses.
Calculating the Property Tax Deduction
So let’s cut to the chase with the calculation!
To accurately determine your deductible amount, follow these steps:
(1) Measure Your Home Office Space
Calculate the square footage of the area used exclusively for business.
(2) Determine Total Home Area
Measure the total square footage of your residence.
(3) Calculate Business Use Percentage
Divide the home office area by the total home area to find the percentage dedicated to business use.
For example, if your home office is 200 square feet and your home is 2,000 square feet, the calculation is:
200 sq ft (office) ÷ 2,000 sq ft (home) = 0.10, or 10%
(4) Apply the Percentage to Property Taxes
Multiply your annual property taxes by the business use percentage to determine the deductible amount.
For example, with annual property taxes of $5,000:
$5,000 × 10% = $500
For the purpose of this example, you could deduct $500 as a business expense on your taxes.
Regular Method vs. Simplified Method
Regular Method (Actual Expenses Method)
The calculation above is called the regular method (or actual expense method) because it uses the actual expenses in the calculation.
Simplified Method
The IRS also offers a simplified method, which allows a deduction of $5 per square foot of the home office, up to a maximum of 300 square feet.
In this case , the deduction equates to a maximum of $1,500 on an annual basis.
While this method simplifies calculations, it may result in a lower deduction than the regular method, depending on your actual expenses.
💡 Tip: go directly to the IRS website for more information about the Simplified Method.
Renters Are Not Eligible for This Deduction (Sorry!)
The home office deduction for property taxes is specifically designed for homeowners, as it pertains to the ownership taxes they pay on their property.
Renters, on the other hand, do not pay property taxes directly. Instead, they pay rent to their landlords, who are responsible for property taxes.
However, there are other benefits for Renters!
They may be eligible to deduct a portion of their rent if they use part of their rented home exclusively and regularly for business purposes.
This deduction for Renters falls under business expenses rather than property tax deductions.
💡 Tip: Learn more about deducting rent in my previous post:
Next Steps
With this series on home office deductions complete, I am going to shift gears and focus on accounting, bookkeeping, and tracking income and expenses!
Continue the Journey with Post #34 —>
