Homeowner's Insurance: Will It Cover a Home-Based Business?

Q: "I am selling stuff on eBay out of my home. Will my homeowner's insurance policy cover my eBay inventory if the place burns down?"

A: Generally, no. Your homeowner's policy generally covers only loss or damage to your home and its personal contents. It does not cover business-related assets, which are presumed (just to show how the insurance industry hasn't caught up with the times) not to be home related and thus are presumed to be covered under another policy.

Most homeowner's insurance policies offer a home office rider that would cover your office furniture, equipment, and eBay inventory in the event of casualty. Look into that, as it's almost always a better deal than seeking a separate business insurance policy for your home-based business.

Taking the Home Office Deduction

Q: "Is it true that taking the home office deduction will almost always trigger an audit?"

A: No. Don't believe what other people may tell you or what you might read in some older, pre-2000 tax guides. Taking the home office deduction is not going to trigger an audit that will automatically expose you and your tax return to review by the IRS. Back in the 1980s and 1990s, the IRS did audit aggressively in this area, but Congress and the courts have done a lot since then to clarify the rules under which you can legitimately take the home office deduction. Furthermore, so many people are taking the home office deduction now that the IRS doesn't have time to chase them all down.

There is absolutely no reason why you shouldn't take the home office deduction if you are indeed conducting your eBay activities out of a bona fide home office.

Q: "It's very difficult to measure my home office space, because there are pieces of it in several rooms of my house. Can I still take the home office deduction?"

A: Technically, yes, but if you are ever audited it's going to be difficult to calculate your home office space with everything spread out like that. The best home office is in a dedicated room of your house (such as a spare bedroom or the loft space above your garage) that is self-contained. That way it's a lot easier to measure. It's also a lot easier to keep personal stuff out of a dedicated home office than a corner of a kitchen, family room, or living room. You can use duct tape to mark off the business area of these rooms, but it doesn't look very attractive.

The steps involved when you take the home office deduction are discussed on pages 202-205 of my book The eBay Seller's Tax and Legal Answer Book.

Q: "Can you talk about the requirements for the décor of a home office? I've had a home office set up for the past several years. It is decorated to suit my taste in décor and collectibles and also has custom bookcases with books I enjoy. Must I completely remove everything not associated with eBay sales in order to claim it?"

A: Not at all. You can have appropriate décor in your home office if it's something you would have in an outside office. So, for example, a bookcase with general business books (not eBay specific) is perfectly okay. A bookcase full of romance novels (unless, of course, you sell romance novels on eBay) probably wouldn't be.

If you sell Asian antiques, by all means put Japanese prints on the wall. Rock posters, on the other hand (unless they are anime-themed or in Japanese for a rock concert at the Budokan amphitheater in Tokyo), probably should go elsewhere.

Always keep in mind that when the IRS audits a home office, the first thing they look for is inappropriate furnishings and decorations. If you have any doubts about a specific item, it's probably safer to remove it than to take the risk of blowing your home office deduction.

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