How to Deduct Your Home Office on Your Taxes

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In order to deduct your home office, your business must follow the following rules.

  1. Your home must be your principal place of business. This means is that you conduct all of your business related activities in your home and you have no other set locations where you do business
  2. You must have a special area sectioned off for your business. This might be a separate room or the garage. Anywhere that you store inventory or products counts as well.
  3. You must actually conduct business at home and use the dedicated space solely for business. This one sounds like a no brainer, but this is to prevent people from setting up a fake office and taking it as a deduction. What this also means is that you should remove the bed and dressers from the room as well.

If you meet the above rules, the way you handle the deduction depends on whether you own or rent your home.

Deducting a Rental

Deducting a home office for renters is the simplest case to deal with. Simply calculate the percentage of space that your business occupies and multiply this by the amount of rent that you pay each year.

Also, don’t forget to include your utilities and insurance policies as well.

Deducting a Home That You Own

When you actually own your own home, things start to get a bit more complicated and the tax rules aren’t nearly as advantageous as when you rent. Below are steps you must follow to claim your home office deduction.

  1. Calculate the percentage of space that your business occupies.
  2. Calculate the cost of your house itself. You’ll need to separate out the cost of the house versus the cost of the land. Unfortunately, in many cases, the value of your land greatly trumps the value of your house
  3. Calculate all of the expenses relating to utilities, repairs, taxes and insurance.
  4. Add up items 2 and 3 above and multiply this by the percentage calculated in item 1.
  5. Add the depreciation amount applicable to your house. Check the IRS and figure out what the depreciation rules are for your house. This isn’t that complicated, but you should check with your accountant just to make sure how to do it properly since it changes from year to year.
  6. Add in any expenses that we done directly to your home office and not to the rest of the house. This includes decorations and furnishings.

The main disadvantage of running your business out of a home that you own is that you’ll have to pay taxes on the amount you’ve depreciated on your house when it comes time to sell your home. For example, if your house is worth 100k and you depreciated it 10k. When you sell your house, you’ll need to pay taxes on the gain from what you sold it for minus 90k.

Audit Risk

In general, your chances of getting audited when taking the home business deduction are much much higher if your business doesn’t show a profit. If your business isn’t profitable, I wouldn’t advise taking the home office deduction but I always err on the more conservative side.

If you do take the deduction anyways, make sure that you can prove that your business is actually legit and not just a hobby of yours that you are taking advantage of. Also keep in mind that your chances of an audit go up for every year that you don’t show a profit.

Learn other ways on how to save on your tax return

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7 thoughts on “How to Deduct Your Home Office on Your Taxes”

  1. I just stopped by your blog and thought I would say hello. I like your site design. Looking forward to reading more down the road.

  2. Okay I need help on this one first of all I have a very small busines which is a DBA can I still deduct.

    I live in a 1 bedroom apartment as well. I don’t even really have space to set up an office. I am always working majority of the time in a small corner of my living room which is really the corner of my living room couch. I would like to set up an office, but as I said I am limited for space the only space I have is my bedroom- can I do this?

    1. @Yondel,
      You can deduct your office as long as it is a space set aside specifically for your business. So in your case I would section off a small area in your living room, maybe put a desk there, measure the square footage and deduct that portion from your rent.

  3. Thanks for this response… it has been helpful. I moved the coach so that I could section off that corner…

  4. One correction: “When you sell your house, you’ll need to pay taxes on the gain from what you sold it for minus 90k” This does not take into account the exclusion on the sale of your main home. If you have lived in this home 2 out of the last 5 years, you only pay tax on any gain over $250k ($500k for married filing joint returns). So if you depreciate your $100k house down to $90k, you would have to sell it for over $340k ($590k for married filing joint returns) to pay anything in taxes.

    So if you plan on keeping this as your main home, go ahead and depreciate the heck out of it if you don’t plan on selling it for more than a $250k gain. Even if you depreciate your $100k home to zero, you can sell it for $250k and pay no tax! :)

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