The digital nomad lifestyle – working remotely while traveling the world – offers unparalleled freedom and adventure. Fueling this movement are innovative concepts like co-living spaces, which provide community, convenience, and infrastructure for location-independent professionals. But as nomads navigate new cities and cultures, they also face unique financial questions, particularly around taxes. A common query arises: Do co-living spaces offer any special tax advantages for nomads under US law?
While co-living provides numerous benefits like built-in community, flexible leases, and often work-conducive environments, the direct tax advantages are often misunderstood and generally limited. Claiming deductions related to co-living expenses hinges on complex factors like establishing a “tax home,” meeting strict IRS requirements for business expenses, and navigating the rules around travel and home offices. Here at Basta + Croop, based in Charlotte, NC, we understand the intricacies of modern work arrangements and the unique tax challenges faced by digital nomads, regardless of where their travels take them. Whether Charlotte serves as your brief stopover, potential future base, or you simply need expert US tax guidance, understanding the co-living space tax implications for nomads is crucial.
What Exactly Are Co-Living Spaces?
Before diving into taxes, let’s clarify what co-living typically entails. Co-living spaces are modern, communal living arrangements designed to foster community and convenience. Key features often include:
- Private Bedrooms: Residents usually have their own private, furnished bedroom.
- Shared Common Areas: Kitchens, living rooms, lounges, laundry facilities, and sometimes coworking areas or recreational spaces (gyms, pools) are shared among residents.
- Included Amenities: Rent often bundles utilities, Wi-Fi, cleaning services, and sometimes basic supplies or community events.
- Community Focus: Emphasis on social interaction, networking, and shared experiences through organized events or communal design.
- Flexible Leases: Often cater to shorter-term stays compared to traditional apartments, appealing to nomads.
These features create an attractive package for digital nomads seeking stability, community, and hassle-free logistics while working remotely. But do these conveniences translate into tax deductions?
The Crucial Concept: Establishing a “Tax Home” for Nomads
Understanding your “tax home” is paramount before considering any travel or housing-related deductions as a nomad. According to the IRS, your tax home is generally the entire city or general area where your main place of business or work is located, regardless of where you maintain your family home.
For a traditional employee, this is usually straightforward – it’s the city where their office is. For a digital nomad, it becomes significantly more complex.
- No Main Place of Business: If you constantly move and don’t have a principal place of business or work, the IRS considers your tax home to be where you regularly live.
- No Regular Place of Abode: If you have neither a main place of business nor a place where you regularly live (i.e., you’re truly transient), the IRS may consider you an “itinerant” whose tax home is wherever you happen to be working. Crucially, itinerants generally cannot deduct travel expenses (including lodging like co-living) because they are never considered to be traveling “away from home” for business.
To potentially claim travel expenses (which could include lodging costs under specific circumstances), a nomad generally needs to establish that they do have a tax home they are traveling away from for business purposes. The IRS considers three factors to determine if you have a well-defined tax home versus being itinerant:
- Do you perform part of your business in the area of your main home and use that home for lodging while doing business there?
- Do you have living expenses at your main home that you duplicate because your business requires you to be away?
- Do you have family members living at your main home, or do you frequently use the home for lodging?
If you satisfy all three factors, you likely have a tax home. If you satisfy two, you may have a tax home depending on facts and circumstances. If you satisfy only one or none, you are likely considered an itinerant. This distinction fundamentally impacts the deductibility of co-living costs when traveling. Navigating this is a key area where professional advice from firms like Basta + Croop is invaluable. Find more details on the IRS definition of a Tax Home (External Link to IRS Publication 463).
Are Co-Living Rent or Fees Tax Deductible?
Generally, the rent or monthly fees paid for your primary residence are not tax-deductible personal living expenses. This applies whether it’s a traditional apartment or a co-living space if that space functions as your main home or you lack a tax home elsewhere.
However, deductions might be possible under specific, limited circumstances:
The “Ordinary and Necessary” Business Expense Test
For any expense to be deductible as a business expense, it must be both “ordinary” (common and accepted in your trade or business) and “necessary” (helpful and appropriate for your trade or business). Lodging can be a business expense, but usually only under specific conditions.
The “Travel Away From Home” Requirement
This is where the “tax home” concept becomes critical. You can potentially deduct lodging expenses (like co-living fees) only if you meet all of the following conditions:
- Your duties require you to be away from the general area of your tax home (see above) substantially longer than an ordinary day’s work.
- You need to sleep or rest to meet the demands of your work while away from home.
- The expense is incurred while pursuing your trade or business.
- The expense is not “lavish or extravagant.”
Scenario: Imagine a nomad whose established tax home is undeniably Charlotte, NC (perhaps they maintain a permanent residence there, have significant business ties, etc.). If they travel to Lisbon for three months for a specific business project and stay in a co-living space temporarily, the portion of the co-living fees attributable to lodging during that specific business trip could potentially be deductible as a travel expense.
However: If the nomad gives up their Charlotte residence, doesn’t maintain strong ties, and essentially makes the co-living space their current (even if temporary) home, or if they are considered itinerant, the deduction is generally disallowed. The co-living space fee becomes a personal living expense.
Potential Deduction for Business Use of Space (Home Office Equivalent)
Could a portion of the co-living fee be deductible as a home office expense? This is extremely difficult in most co-living situations. We’ll explore this next.
The Home Office Deduction in a Co-Living Context: A High Hurdle
The home office deduction allows taxpayers to deduct expenses related to the portion of their home used exclusively and regularly for business purposes. Key challenges in co-living include:
- Exclusivity Test: This is often the biggest barrier. The space claimed must be used only for business. Using a corner of your private bedroom that also contains your bed and personal items typically fails this test. Using a shared coworking area within the co-living building also fails the exclusivity test because it’s not exclusively your space and is used by others for various purposes. Unless you rent a specific, separate room within the co-living facility designated solely for your business use (which is uncommon), claiming this deduction is problematic.
- Regular Use Test: You must use the space regularly for business, which is usually met by nomads working full-time.
- Principal Place of Business Test: The space must be your principal place of business, or a place where you meet clients/customers in the normal course of business, or a separate structure not attached to your dwelling unit used in connection with your business. For nomads, determining the “principal” place can be complex if work happens in various locations.
Given these strict requirements, particularly the exclusivity test, successfully claiming a standard home office deduction for space within a typical co-living arrangement is highly unlikely for most nomads. The IRS provides detailed information on the Home Office Deduction (External Link to IRS website).
Specific Expenses Within Co-Living That Might Be Deductible
While the main rent/fee is usually non-deductible or difficult to deduct, some specific, identifiable business expenses incurred while staying in co-living could potentially be deductible if they meet the “ordinary and necessary” test:
- Dedicated Business Internet: If you pay separately for a higher-speed or dedicated internet connection solely for your business needs (beyond the basic Wi-Fi included in the rent), that specific cost might be deductible.
- Specific Business Supplies: Costs for supplies used exclusively for your business (specialized software subscriptions, potentially printing costs if tracked separately) remain deductible regardless of your living situation.
- Business Use Portion of Utilities (Very Difficult): If a specific area did somehow qualify as a home office (meeting exclusivity tests), you could potentially deduct the business percentage of utilities. However, in a co-living space where utilities are bundled and usage is communal, accurately calculating a defensible business-use percentage is practically impossible.
The key is separating identifiable, direct business costs from the general cost of lodging and personal living.
State Tax Implications for Nomads
Beyond federal taxes, nomads must consider state taxes. Moving frequently can create complex state tax situations:
- Nexus: Performing work in a state, even temporarily, can create “nexus,” potentially requiring you to file and pay income tax in that state. Rules vary significantly by state. A nomad working for a week in Charlotte could theoretically trigger NC filing requirements, though states have different thresholds.
- Residency: Establishing or breaking residency in a state has major tax implications. Spending significant time in one state, even in co-living, could inadvertently establish residency there, subjecting your entire income to that state’s taxes. Maintaining ties to a “home base” state (like North Carolina, if applicable) while traveling requires careful management.
- Double Taxation: Without careful planning and understanding tax treaties or credits for taxes paid to other states, nomads risk being taxed on the same income by multiple states.
Navigating multi-state tax issues is complex. Seeking advice from professionals like Basta + Croop, who understand both federal and North Carolina state tax laws (and can research others), is highly recommended.
Meticulous Recordkeeping: Non-Negotiable for Nomads
If you believe you do qualify to deduct certain co-living related expenses (e.g., as travel away from an established tax home), meticulous records are essential:
- Track Travel Dates & Locations: Keep logs of where you were and when.
- Document Business Purpose: Clearly note the business reason for travel or specific expenses incurred.
- Separate Receipts: Keep detailed receipts for lodging, specific business costs (like internet upgrades), travel fares, etc. Do not rely solely on bundled co-living invoices if trying to isolate business expenses.
- Maintain Proof of Tax Home: Keep records related to your established tax home (if applicable), such as property tax bills, utility statements, voter registration, driver’s license, etc.
Disorganized records make deductions impossible to substantiate if questioned by the IRS or state tax authorities.
Common Misconceptions About Co-Living Tax Breaks
- “Co-living is cheaper, so it must be deductible.” Cost doesn’t determine deductibility; the expense’s nature and purpose under tax law do. Personal living expenses aren’t deductible, regardless of cost savings.
- “The coworking space inside makes it a business expense.” Shared coworking spaces generally fail the “exclusivity” test for the home office deduction.
- “Because I work while traveling, all my travel lodging is deductible.” This hinges entirely on having an established tax home you are traveling away from for business. Itinerants generally cannot deduct travel lodging.
- “Bundled bills make it easy to deduct a percentage.” Bundling actually makes it harder to isolate and justify specific, deductible business expenses from non-deductible personal living costs.
Why Nomads Urgently Need Professional Tax Advice
The US tax code wasn’t explicitly designed for the modern digital nomad lifestyle. Applying traditional rules to non-traditional work and living arrangements creates significant grey areas and potential pitfalls. Relying on internet forums or assumptions can lead to costly mistakes, including:
- Claiming deductions you aren’t entitled to, leading to audits, back taxes, penalties, and interest.
- Missing legitimate deductions due to misunderstanding the rules.
- Failing to comply with complex state tax filing requirements.
- Incorrectly determining your tax home status.
Engaging with experienced tax professionals who understand remote work and individual tax complexities is crucial. Firms like Basta + Croop provide personalized guidance based on your specific facts and circumstances. Check out our Individual Tax Preparation and Tax Planning Services – suggested internal links. Nomads running their own businesses may also benefit from Business Advisory Services – suggested internal link.
How Basta + Croop Can Assist Nomads with US Tax Matters
Even though we’re based in Charlotte, NC, Basta + Croop serves clients with diverse situations, including US citizens working remotely domestically or abroad. We can help nomads:
- Determine Tax Home Status: Analyze your situation to advise on whether you likely have a tax home or are considered itinerant.
- Evaluate Potential Deductions: Review your expenses and circumstances to identify potentially legitimate deductions related to business travel or specific costs, explaining the rigorous IRS requirements.
- Navigate State Tax Complexity: Help understand potential filing obligations in various states you may work from, including North Carolina if you spend time here.
- Ensure Compliance: Prepare accurate federal and state tax returns reflecting your unique situation.
- Provide Year-Round Tax Planning: Offer strategies to structure your nomadic lifestyle in a tax-efficient manner, minimizing surprises.
Whether you maintain ties to the Charlotte area, are just passing through, or simply need reliable US tax expertise accessible remotely, Basta + Croop offers the professional support you need.
Final Perspective: Focus on Facts, Not Assumed Advantages
While co-living spaces offer compelling lifestyle benefits for digital nomads – community, convenience, flexibility – they do not automatically grant special tax advantages under current US tax law. The deductibility of any expense related to co-living hinges on fundamental tax principles: establishing a tax home, meeting the requirements for travel expenses away from that home, satisfying the stringent tests for any potential home office deduction (which is rare in this context), and keeping meticulous records.
Misinterpreting the rules can lead to significant financial headaches down the road. For digital nomads navigating the complexities of US taxes while living and working around the globe or across the country, seeking professional guidance isn’t just helpful – it’s essential. Don’t leave your tax situation to chance or guesswork.
If you’re a digital nomad with questions about your US tax obligations or the potential deductibility of your expenses, reach out to the experienced team at Basta + Croop. We provide clear, accurate advice tailored to your unique nomadic journey, right from our home base in Charlotte, NC. Contact us today at (704) 270-5966 or visit our website to schedule a consultation and ensure you’re navigating your taxes correctly, wherever your work takes you.