The Home Office Deduction

Qualifying for the deduction

Under IRS rules, you can deduct expenses tied to business use of your home, but only if the space is used exclusively and on a regular basis. To qualify, you need to meet one of these tests:

• The space is your principal place of business, used exclusively and regularly for that purpose.
• You use it as a place to meet with clients or customers in the ordinary course of business.
• You use it for administrative or management activities, and you don't have another fixed location where you conduct a substantial amount of that same administrative work.

A separate structure not attached to your home, used regularly and exclusively for your business, also qualifies. The exclusive use test means a specific part of your home is used solely for business, not occasionally borrowed for personal use. The regular use test means the space is used on an ongoing basis, not just once in a while.

When it comes to determining your principal place of business, the IRS looks at two factors: do you spend more business related time there than anywhere else, and are your most significant revenue generating activities actually performed there? Both questions matter; a home office that fails either test generally won't qualify as your principal place of business.

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The rules are different for employees

Tax reform passed in 2017 repealed certain itemized deductions on Schedule A for tax years 2018 through 2025, including employee business expense deductions tied to home office use. That change affects W-2 employees far more than it affects self employed business owners.

For tax years before 2018, employees could claim home office expenses if they met two additional tests: the home office had to be for the convenience of the employer, not just the employee, meaning the employer didn't provide a workspace, and the employee couldn't be renting part of the home back to the employer and using that space to perform their job. Employees who telecommute may still be able to satisfy these requirements, but the itemized deduction pathway itself is currently unavailable through 2025.

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The three categories of home office expenses

Home office expenses generally fall into three buckets:

• Direct business expenses tied specifically to the business part of your home, like additional phone lines or long distance charges. Basic local phone service for your first line generally doesn't qualify.
• Indirect business expenses, the costs of running your home overall, such as mortgage or rent, insurance, real estate taxes, utilities, and repairs, allocated based on the business use of your home.
• Unrelated expenses, like painting a room that isn't used for business or general lawn care, which aren't deductible at all.

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How the deduction limit works

You can deduct the full amount of your home office related business expenses if your gross income from that business use equals or exceeds your total business expenses, including depreciation. If your income is lower than your expenses, certain deductions, insurance, utilities, and depreciation allocable to the business, get limited to your gross income from the business use of your home, minus a couple of specific offsets described in IRS guidance.

If your deductions exceed that year's limit, you're not out of luck; you can carry the excess forward to the following year, where it's subject to that year's limit, regardless of whether you're still living in the same home.

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What happens when you sell the home

If you use part of your property as a home and part for business, current rules generally still allow a $500,000 exclusion (married filing jointly) or $250,000 exclusion (single or married filing separately) on gain from selling your primary residence, as long as you meet ownership and use tests over the five years ending on the sale date: owning the home for at least two years and living in it as your main home for at least two years.

If the business space is inside your home, like a room used as an office, there's typically no need to allocate gain between the business and personal portions of the property. If the business use involves a separate structure, like an outbuilding, additional rules apply, including whether the use test was met for that specific part of the property. If you're unsure whether your situation qualifies for the exclusion, it's worth a call before you sell.

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The simplified home office deduction

Since the 2013 tax year, there's been a simplified option available as an alternative to calculating actual expenses. The simplified deduction is capped at $1,500 per year, based on $5 per square foot for up to 300 square feet. You can't depreciate the business portion of your home if you use this option, but you can still claim allowable mortgage interest, real estate taxes, and casualty losses as itemized deductions on Schedule A, without needing to allocate them between business and personal use. Business expenses unrelated to the home itself, like advertising, supplies, and employee wages, remain fully deductible either way.

The underlying requirements don't change under the simplified option; the space still has to be used regularly and exclusively for business, and the deduction is still tied to income from that specific business. What changes is the paperwork: taxpayers using the regular method complete Form 8829, while the simplified option uses a shorter form.

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