Self-employed taxpayers who use part of their home for business may be able to deduct a share of their home expenses. The deduction comes with specific use requirements, a choice between two calculation methods, an income limitation, and consequences when the home is later sold.
Who Qualifies
Under §280A and IRS Publication 587, a part of the home generally qualifies only if it is used regularly and exclusively for the business in one of these ways: as the principal place of business; as a place to meet or deal with patients, clients, or customers in the normal course of business; or, for a separate structure not attached to the home, in connection with the business. Storage of inventory or product samples and certain daycare facilities are exceptions to the exclusive use requirement when their own conditions are met.
Exclusive use means the specific area is used only for business. A room that also serves as a guest room or family space generally does not qualify. Regular use means consistent use, not occasional or incidental use.
A home office can be the principal place of business even if work is also performed elsewhere. According to Publication 587, it qualifies if it is used exclusively and regularly for administrative or management activities of the business and there is no other fixed location where the taxpayer conducts substantial administrative or management activities.
Employees
For federal purposes, employees generally cannot deduct home office expenses. Unreimbursed employee expenses are miscellaneous itemized deductions, which are disallowed for tax years beginning after 2017, and the One Big Beautiful Bill Act made that disallowance permanent (§67(g)). California has not adopted the federal disallowance, so an employee may be able to claim qualifying unreimbursed employee business expenses on a California return.
The Simplified Method
The simplified method allows a deduction of $5 per square foot of qualifying space, up to 300 square feet, for a maximum of $1,500 per year. Under this method:
- Depreciation on the home office is treated as zero for that year.
- Mortgage interest, real estate taxes, and casualty losses are treated as personal expenses rather than allocated to the business, so they may be claimed as itemized deductions under the usual rules.
- The deduction is limited to gross income from the business use of the home, reduced by other business deductions, and any excess cannot be carried forward.
- A taxpayer can choose the simplified or actual method each year.
The simplified method reduces the calculation, not the qualification rules. The space must still meet the regular and exclusive use requirements, and the square footage should be documented.
The Actual Expense Method
Under the actual expense method, the business percentage of the home, usually the office’s square footage divided by the home’s total square footage, is applied to indirect expenses such as mortgage interest or rent, real estate taxes, insurance, utilities, general repairs, and depreciation on the building (not the land). Expenses that relate only to the office, such as painting that room, are generally deductible in full. Sole proprietors generally compute the deduction on Form 8829.
For example, assume a 2,000-square-foot home with a 200-square-foot office, a 10 percent business percentage. If the year’s mortgage interest is $10,000, real estate taxes are $4,000, utilities are $2,400, insurance is $1,200, and general repairs are $1,000, the indirect expenses total $18,600, and 10 percent, or $1,860, is attributable to the office, before adding depreciation on 10 percent of the building’s basis.
The deduction is limited to gross income from the business use of the home minus other business expenses. Under the actual method, amounts disallowed by that limit can be carried forward to the next year in which the actual method is used.
The simplified method is capped at $1,500 but involves no depreciation. The actual method can produce a larger deduction but requires more records and includes depreciation, which has consequences when the home is sold.
Depreciation and Selling the Home
Depreciation claimed on the home office under the actual method reduces the home’s basis. When the home is sold, gain equal to that depreciation generally cannot be excluded under the home sale exclusion. According to the IRS, unrecaptured section 1250 gain from selling real property is taxed at a maximum 25 percent rate. Years in which the simplified method is used involve no depreciation for the office.
This is a cost to weigh, not a reason by itself to avoid the actual method. The value of current deductions, the expected holding period, and the likely sale price all affect the comparison.
Documentation
Useful records include measurements of the office and the home, photographs or a floor plan showing the space, records showing how the space is used for the business, and, for the actual method, bills and statements for each expense claimed and records of the home’s basis and depreciation.
The Bottom Line
The home office deduction is available to self-employed taxpayers whose space meets the regular and exclusive use tests. Choosing between the simplified and actual methods each year, keeping the space clearly separate, and keeping records that support both the use and the numbers are the keys to a supportable deduction.
Questions about business deductions?
Tax attorney Cassra Minai, Esq. can review your situation in a confidential consultation.