Home office deduction - does it raise a red flag to the IRS?

Question

I own two rental properties & want to form an LLC. Is this enough homes to do this? They're not worth but about 50k each. Is the IRS extremely picky when it comes to deducting part of your home to "manage" your business (in this case, an LLC)? I have a friend that works in sales, like me, and this friend does it every year (although, from a moral perspective, I think it's wrong... they have a lot of personal belongings in their "office.") Any help is appreciated.

By what percentage will forming an LLC reduce my tax rate?

I know nothing about taxes, as my wife is an accountant (she thinks the idea of setting an area of our house as "office space" is a red flag to IRS).

Answer 1

You better believe it's a red flag.  If you INSIST on using a home office, it MUST be separated from the rest of the house.  I have known people who had a small room built for that purpose.. with separate electric and gas and even water and they STILL got hammered by the IRS on an audit.

Answer 2

Mrs. TLC is right, the home office expense deduction will be carefully scrutinized by the IRS.  The rules for this deduction are very strict (see IRS Pub 587), and few home offices qualify.  Forming an LLC is a matter of liability protection only.  An LLC is taxed as either a sole proprietorship, or, if you and your wife both participate, as a partnership.

Questions?  Contact me at http://members.toast.net/busra17

Answer 3

The IRS cracked down on the "home office" because there was significant abuse.  But as long as you're doing everything legal, even if you're audited - so what.

Read this publication:

http://www.irs.gov/pub/irs-pdf/p587.pdf

Answer 4

The IRS doesn't even recognize an LLC, so it's not going to lower you taxes.  (One member defaults to the 1040, two or members defaults to a 1065.)

You can't deduct a home office for managing an investment.  You aren't conducting business there, you are reviewing paperwork which you could do anywhere.

Besides, look at what you were planning to deduct, a portion of mortgage interest (already deductible), property taxes (already deductible), out of pocket expenses (still deductible), depreciation (has to be paid back when you sell and can't be excluded with the $250K deal), and a questionable amount of utilities (the audit flag).