Can I Take the Home Office Deduction?

Tax Tips

Do you regularly work from your home, either as an employee or for your own business? If you’re like many taxpayers who do, you may be wondering “Can I take a deduction for working from home?

You may be able to take the Home Office Deduction. There are a number of qualifications you can pass in order to take this deduction:

  • Exclusive and Regular Use: This must be your exclusive and regularly used principal place of business. If you are an employee, it must be for your employer’s convenience that you work from home. For example, two salesmen work for a company, one near a major city where the employer maintains a office for the local sales force and holds their meetings. This salesman cannot claim a home office deduction. The other lives in a smaller region, no office space is provided. He may be entitled to the deduction.
  • Exclusive and Regular Meeting place: You use a portion of your home to meet with patients, clients or customers. This is common for some doctors, especially psychiatrists, or financial advisers who have small practices. The exclusivity rule is important to note here. The IRS offers an example of an attorney who makes regular use of a room to prepare his work, but if that room is also used as a den for the family, he just lost his potential deduction.
  • There is a separate, unattached, structure where you maintain you trade or business. This is well suited to the craftsman who has his shop on the same property as his home. Many of the old fashioned crafts come to mind, woodworking, pottery, glass blowing, among others.
  • Exceptions to the exclusivity rules include use for storage of samples or items for sale, and for operating a daycare-facility. For these two uses it’s the ‘regular’ use that’s required.

Above, I’ve touched upon the rules which would allow or disqualify you from taking the home office deduction. IRS Publication 587 Business Use of Your Home offers a more comprehensive look at this topic.

Now that you have a good idea of whether you can take the Home Office deduction, let’s look at what exactly, we mean, the things you can deduct:

  • Mortgage Interest
  • Real Estate Taxes
  • Insurance
  • Repairs & Maintenance
  • Utilities
  • Depreciation

Note: All of the above items are pro-rated to the area of your home used for business. e.g. if the square footage of your home office is 12% of the total home area, then 12% of the above items are a deduction. For Depreciation, you begin by depreciating 12% of the value of the house (not land). The intricacies of depreciation are discussed in Publication 527.

Many who qualify don’t bother to take this deduction, feeling that it’s too much effort. I’ll admit, there’s a bit of bookkeeping required, numbers to track, but in the end, it’s money in your pocket. Don’t walk away from it.