Taxes: The Office-In-Home Deduction

article image
Photo by Fotolia/4matic
To claim the home-in-office deduction, make sure your work area is clearly separate from your personal living space.

The office-in-home deduction is generally not provided for people working for an employer, unless the office is “for the convenience of your employer” and “not just appropriate and helpful.” In any event, to claim an office-in-home deduction, you must use the area “regularly and exclusively,” and it must be either (a) your principal place of business or trade, (b) a place to meet clients, customers, or patients, or (c) a separate building for trade or business. No personal activities may take place in this office; rather, the activities must be a trade or business — not personal investment.

Note the inequity that allows an employee of a company to use the company’s work space to reconcile his or her personal checkbook, or to keep various personal records, while the self-employed person can’t put the office-in-home to any personal use. Exclusive use is 100%, not 99.99%: People have lost their entire deductions because they reconciled their personal checkbooks in their offices-in-home.

The exclusive-use rule does not apply to registered day-care centers.

If you can qualify according to the restrictions listed above, you may deduct that portion of your household expenses that relates to the area used for the office. This is calculated by figuring the percentage of a house’s square feet in use for business and apportioning that percentage of taxes, mortgage interest, maintenance, operating expenses, and depreciation. These deductions must be reported on Schedule A, C, E (partnership), F (farm income), or 2106 — as is appropriate.

If you use a computer in a qualified office-in-home, you don’t have to keep a detailed usage log — as is the usual requirement — in order to depreciate it using ACRS. Bear in mind, however, that if your office-in-home is denied, that log will be required retroactively. So you may want to keep a log anyway.

Another important consideration, if you claim an office-in-home, is that you may not defer capital gains on the portion of the house that is your office-in-home, if you claim that deduction in the year in which you sell your home. When you sell, depreciation must be recaptured, as described inTaxes: Understanding Depreciation  . For more information, see Publication 587.