With easy Internet access, more and more people are choosing to work from home. Having a home office may provide tax savings, but can also create headaches when you decide to sell your home.
You are allowed to claim a deduction for the business use of your home under any of the following circumstances:
• You use a portion of your home regularly and exclusively:
* As the principal place of business for a trade or business;
* As a place to meet with clients, patients, or customers in the course of the trade or business; or
* In connection with your trade or business, if the location is in a separate structure not attached to the home.
Note: “Exclusive use” means a specific area of your home is used only for your trade or business. The term “principal place of business”
includes a place that you use for administrative or management activities of any trade or business if there is no other fixed location where you are able to perform those activities.
• Your employer requires that you maintain a home office for his or her convenience and you meet the regular and exclusive use requirement.
• Your home is used for the storage of inventory or product samples used in your trade or business of selling products at retail or wholesale and there is no other fixed location for storage. The regular and exclusive use requirements do not need to be met.
• You operate a day care out of your home. If you do not meet the regular and exclusive use requirements, you can still claim a home
office deduction if you are complying with state and local laws in operating your home day care.
• Consider direct and indirect expenses when making home office calculations.
• Direct expenses are those that pertain exclusively to the home office, such as painting the walls or installing new cabinets, shelving,
• Indirect expenses are those that pertain to the entire residence, such as rent, mortgage interest, taxes, insurance, repairs, security systems,
utilities, casualty losses, and depreciation.
• Allocate indirect expenses between the business and non-business portions of the home. This is done based on the business use percentage of your home.
* The business use percentage is most often found by dividing the square footage of the office by the total amount of usable space in
* With a day care business, multiply this business use percentage by the fraction obtained by dividing the number of hours you use the home for business by the total number of hours in the year (8,760 hours, except in leap years).
The amount of expenses you can deduct are subject to specific limitations and ordering rules. The overall limitation is based on your net income from your trade or business.
• For employees, this is your wage less other business expenses listed on Form 2106.
• For self-employed persons, this is the net income shown on your Schedule C without the home office deduction.
• If there is a loss, you are not allowed a deduction and the expenses are carried forward to future years and are allowed when there is
• You are allowed three deductions in full regardless of the net income limitation. They are allowed even though they may create a loss.
These expenses are claimed in full before using any other expenses:
* Mortgage interest
* Real estate taxes
* Casualty or theft losses
• Once net income is reduced by these expenses, you can deduct other business expenses to the extent you have business income.
• If business income remains at that point, you can deduct depreciation.
• Any time business income reaches zero, carry forward the balance of the expenses.
• If you close your business before the carry forward amounts are used, they are lost.
Homes Sales and Excludible Gain
When you sell your home that had been the location of your home office, some of your gain may be taxable.
• The depreciation the IRS allowed you to claim on your home office is subject to taxation even if it meets the personal use rules at the
time of sale. This depreciation is considered “unrecaptured §1250 gain” and will be taxed at a maximum rate of 25%. The remaining gain is eligible for the exclusion.
• Employees may avoid these potential tax situations by renting a portion of their principal residence to their employer.
Home office expenses can represent a significant dollar amount in reducing your tax liability.
This brochure provides a basic overview of a complicated area of tax law. If you think your situation meets the requirements, talk to your tax advisor for more specific details on how to qualify for this deduction.
This brochure contains general tax information for taxpayers.
As each tax situation may be different, do not rely upon this
information as your sole source of authority. Please seek
professional advice for all tax situations.
#853 – © Copyright May 2010
National Association of Tax Professionals
PO Box 8002
Appleton, WI 54912-8002