Home office for managing rental on Sch E?

I have searched the home office and rental properties in this forum. We disputed the reasonable size of the home office and the amount of deduction, but we never questioned the if the home office expenses can be deducted against rental income. This is taken for granted, then why in this court case ( https://scholar.google.com/scholar_case ... 7235183703 ), the judge argue in great length on whether home office can be used for rental? It was convoluted reading, and I fail to see what he was arguing? That was 1980, and now there is no doubt that home office can be deducted for rental?

Suppose it is the case, I would like to get an idea what is the percentage of your clients claim home office deduction? And the average dollar amount deducted?

Given that rental is a passive business, the activity should be light. I am wondering what you would tell your clients if they want to claim all sorts of things such as computer, cell phone, internet, desk, etc to "manage" the rental properties?

First you need a trade or business.

Then you need regular and exclusive use. "Regular" is the hard part. A mere few hours per month isn't going to cut it. If the taxpayer has a PM that handles the day to day, they'll most likely fail the regular component. They'll also most likely fail if they only have one or two units. Just a few hours each day (2-3) managing the trade or business should work. However, clients often have a misconception here about "managing the trade or business". Yes, we actually need hours running a trade or business, time spent searching the MLS for new properties or reading real estate blogs doesn't count.

Then you need to meet one of the prongs under Sec 280A(c)(1).

I am wondering what you would tell your clients if they want to claim all sorts of things such as computer, cell phone, internet, desk, etc to "manage" the rental properties?

I have a conversation with the client about reasonable allocations for business use and personal use. For example, If I know that the client has 100% of the cost of the household internet on his P&L, and he's a family of four and the spouse and kids do not participate in the business, I convey that his allocation is most likely not reasonable unless no one is allowed to use the internet for personal purposes, including him. That ususally gets a chuckle but it conveys the mindset we need to have when apportioning these costs And, in 2022, we need to take into consideration that a great deal of personal internet usage, both in terms of bandwidth and time, come in the form of video streaming. That's just one expense example.

First you need a trade or business.

Thanks Man for always being helpful! Yes whether rental activity qualifies as a trade or business for the purpose of home office is my concern. In the court case of Curphey vs the IRS ( https://scholar.google.com/scholar_case ... 7235183703 ) the judge spent a great deal debating if rental is qualified trade or business. I do not quite follow how he came to the conclusion:

Accordingly, keeping in mind respondent's concession (see n. 11 supra), we hold that petitioner is entitled to a deduction for expenses incurred in connection with the use of a portion of his residence as an office.

Is this specific for the case where the taxpayer is going to be retired, and rental is his primary source of income? Or is this generic that any rental on Sch E would be a trade or business qualified for home office deduction?

And how would rental compared with stock transaction on Sch D (i.e. "normal" stock activity not a day trading etc)? Can seminars, subscriptions, home office etc. be used as deductions on stock income? Rental on Sch E is different from stock?

Retirement and sources of income don't come into play. Whether or not you have a trade or business depends on what I like to call substantiality of efforts. Those efforts can either come from the client or his/her agents. There is plenty of case law out there surrounding whether one or more rentals rise the level of a trade or business. It's not a high bar to meet IMO.

Rental expenses are above the line deductions. This is true whether the rental rises to the level of a trade or business or is merely held for the production of income.

This is in contrast to other production of income expenses (such as stock and bond investing), which are 2% misc deductions.

Retirement and sources of income don't come into play. Whether or not you have a trade or business depends on what I like to call substantiality of efforts. Those efforts can either come from the client or his/her agents. There is plenty of case law out there surrounding whether one or more rentals rise the level of a trade or business. It's not a high bar to meet IMO.

Man: I get confused. I read from https://www.irs.gov/publications/p925#e ... 1000104567 that:

Trade or Business Activities

A trade or business activity is an activity that:

Involves the conduct of a trade or business (that is, deductions would be allowable under section 162 of the Internal Revenue Code if other limitations, such as the passive activity rules, didn’t apply);

Is conducted in anticipation of starting a trade or business; or

Involves research or experimental expenditures that are deductible under Internal Revenue Code section 174 (or that would be deductible if you chose to deduct rather than capitalize them).

A trade or business activity doesn’t include a rental activity or the rental of property that’s incidental to an activity of holding the property for investment.

You generally report trade or business activities on Schedule C, F, or in Part II or III of Schedule E.

which clearly says "A trade or business activity doesn’t include a rental activity". On the other hand, I read what you said, and one court case where the judge allowed home office deduction. Can you please clarify, thanks!

That is a very poorly written and misleading excerpt.

That is a very poorly written and misleading excerpt.

The IRS pub 587 (business use of home, https://www.irs.gov/pub/irs-pdf/p587.pdf) says:

Trade or Business Use
To qualify under the trade-or-business-use test, you must use part of your home in connection with a trade or business. If you use your home for a profit-seeking activity that is not a trade or business, you cannot take a deduction for its business use

This trade or business criterion is the same as in QBID (Qualified Business Income Deduction)? The same safe harbor requirement?

The rental activity is considered as trade and business is established by case law, and the IRS is behind accepting it as shown by the previously cited IRS pub 925 (Passive Activity and At-Risk Rules, https://www.irs.gov/publications/p925#e ... 1000104567)?

Look to the case precedence under IRC Sec 162. Don't look to the IRS pubs. At best it's confusing and misleading.

I'll see if I can dig up some cases later. If it slips my mind please DM me.

Yes, 199A also references a 162 trade or business.

https://www.bradfordtaxinstitute.com/Endnotes/73_TC_766.pdf
Facts & circumstances, I've claimed HO for a rental client before.