Do Landlords have Issues with Home-Based Business?
Some Home-Based Business Issues
According to the U.S. Small Business Administration, more than half of America’s businesses are home-based. Most landlords are almost certainly operating as a home-based business, as relatively few landlords maintain an office in a commercial building unless they are either owners/managers of an extensive rental property portfolio or are also licensed real estate brokers that are in the business of managing real estate for others.
But setting up a home business doesn’t mean you can fail to consider all the same issues as important when setting up business at a different location. In this article we’ll briefly discuss some of those issues, specifically, zoning, licenses and permits, insurance, and taxation.
Zoning
Your local planning office will be able to provide information regarding restrictions that could affect your business. Typically, businesses that do not affect anyone outside of the home will not be prohibited from a residential area.
Business Licenses
Business permits and licenses are usually – but not always – only a local issue. Most cities require a permit or license to operate any type of business within the city limits and this technically applies to home businesses. Many cities require a permit or license to operate rental properties and these licenses are usually in addition to the license required to operate a home office business. The rental property license requirement is often applied separately to each property location. That is, if the landlord owns 6 rental homes, 6 licenses will be required, whereas, only one license is usually required for a 6-unit complex on a single parcel. However, for multi-unit properties, the total fee is almost always based on the number of units.
Obtaining a license for a home office can sometimes create problems for the homeowner because of homeowner association bylaws or objections by neighbors. However, this will seldom be a concern for businesses that do not create problems for other property owners – e.g., traffic or parking issues.
Levels of government other than municipal governments may also require registration of rental properties. For example, Arizona property owners are required by Arizona State Law to register each rental property with the county assessor in the county where the property is located. Should an owner fail to register the rental property with the county assessor, the city may impose a civil penalty payable to the city in the amount of $150.00 per day for each day of violation. The city may also impose enhanced inspection and enforcement measures on the property.
Insurance
The fact that you have great homeowners (or renters) insurance and motor vehicle insurance doesn’t mean you are adequately protected related to your business operation. Those maintaining a home office and using a personal vehicle in their business should consult their insurance agents regarding the business usage.
A typical homeowners policy provides about $2,500 of coverage. That usually will cover equipment, probably provide an adequate policy limit. However, it won’t offer business liability protection or cover you for lost data or income.
Similarly, your motor vehicle insurance may not cover you when your vehicles are used in business operations. Also, the insurance of any employees who use their vehicles when working in your business may not cover either you or them when the vehicle is used while working in your business.
Home-based business owners usually have options for obtaining insurance protection for their businesses. The options are generally as follows:
Endorsement to their Homeowners policy – This is an endorsement added to a homeowners policy to increase coverage on business equipment. Some insurers also offer the option to buy a liability endorsement for protection in the event someone is injured on your property.
In-home business policy: An in-home business policy, sometimes called in-home business endorsements provides more comprehensive coverage for business equipment and liability than does an endorsement to their homeowners policy.
Business owners policy: This type of policy (usually called BOP) offers the most comprehensive coverage for small- to mid-size businesses. In addition to protecting against many of the same things that an in-home business policy does, it offers additional protections.
These policies vary significantly among insurers and details of coverage or limits may vary among states.
Detailed discussions of the above and of numerous other landlord insurance issues can be found in our Mini Training Guide titled “9 Landlord Insurance Issues.”
Taxes
Landlords must give consideration to a variety of taxation issues. As usual, for landlords there are taxation issues related to local, state, and federal levels. Included are:
- Property Tax,
- Rent Tax,
- Income Tax,
- Business Personal Property Tax, and
- Estate Tax.
In this limited space article we’ll only discuss briefly the federal income tax because it is the tax that most affects all landlords.
Most landlords know something about various aspects of income taxation: including, depreciation, 1031 exchanges, and a variety of other issues. Some of the issues affect all landlords, many affect most landlords, and all affect some landlords. Of the many income tax issues related to landlords, we’ll briefly discuss only two in this article – the home office deduction and the car expense deduction.
For landlords reporting a home office deduction, it is important to understand the position of the IRS regarding the matter, as a home office deduction is an item that often triggers inquiries from the IRS. The basic requirements for qualifying to claim expenses for business use of your home are that you must use part of your home:
(1) Exclusively and regularly as your principal place of business (as defined by the IRS),
(2) Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business,
(3) In the case of a separate structure which is not attached to your home, used in connection with your trade or business, or
(4-6) Three other uses that are not usually of concern to landlords.
For detailed information regarding the home office deduction, we refer you to IRS Publication 587.
All landlords utilize one or more motor vehicles in the management and maintenance of their properties and deduct expenses of that use on their income taxes. However, probably few landlords fully comply with the IRS requirements regarding the deductibility of vehicle use and many do not even come close. This is another deduction for which landlords must understand and follow IRS rules in order to minimize risk of inquiries.
The IRS says that to take a business deduction for the use of your vehicle, you must determine whether the use was business or personal. If the answer is personal, no deduction is allowed. The IRS also requires that adequate records be kept regarding business use of personal vehicles. This means that one should maintain a contemporaneous log of business use of vehicles. This is best interpreted to mean a log that includes dates, places visited, and relevant odometer readings.
For detailed information regarding the subject of deducting transportation costs, we refer you to IRS Publication 463.