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Business owners can deduct the amount they pay to rent property that relates solely to the business. The IRS does not limit the amount of rent you can deduct provided it is not unreasonable based on all the facts and circumstances. Generally, the rental payments must reflect the market price in the geographic area of the business. The issue of unreasonableness is frequently applicable when you make rental payments to a related party. For example, if a parent company owns property and leases it a subsidiary, the IRS will scrutinize the rental agreement to ensure it reflects market value rather than a tool for shifting taxable income from the subsidiary to the parent.
Taxpayers who rent a personal residence are eligible to deduct a portion of rental payments if they use an area of the home exclusively to perform work-related tasks or to operate a business. Placing office equipment and a desk in a bedroom does not satisfy the requirement if you also sleep in that room. The home office will also not qualify if its presence in the home is solely for your convenience; it must be the result of not having alternative workspace or a requirement an employer imposes on
you. The portion of rent you can deduct is equal to the ratio of the home office’s square footage to the total square footage of the home.
Temporary Work Assignments
If your employer requires you to accept a temporary work assignment in a distant location, you may fully deduct the rent you pay to obtain temporary housing. To qualify, you and the employer must anticipate the work assignment to terminate within one year. If the assignment is indefinite or requires you to remain at the work location for more than one year, the IRS no longer views the situation as temporary, and therefore the rent is not deductible. You must also reduce the deduction for any amount an employer reimburses you for housing expenses.
American taxpayers who live and work abroad are able to recover a portion of the rent they pay in a foreign country through the foreign housing exclusion. Each year the IRS determines a base amount for many international cities that represents its typical cost of living. A portion of the housing payments you incur in excess of the base amount are eligible for exclusion from federal income tax. To qualify, you must earn income in the foreign country through the provision of services.