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Home Office Tax Deduction: Rules, Who Qualifies

The home office deduction is a tax break for self-employed people who use part of their home for business activities. Here's how it works.

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What is the home office deduction?

Small-business owners and freelancers who regularly and exclusively use part of their home for work and business-related activities may be able to write off rent, utilities, real estate taxes, repairs, maintenance and other related expenses. The home office tax deduction can be taken on Schedule C.

» MORE: Other popular tax breaks and tax deductions for this filing season

How does the home office tax deduction work?

You can claim the deduction whether you’re a homeowner or a renter, and you can use the deduction for any type of home where you reside: a single-family home, an apartment, a condo or a houseboat. You can’t use it for a hotel or other temporary lodging

Regular and exclusive use

The space you’re using for business must be used exclusively for conducting business. For example, using a spare bedroom as both your office and your children's playroom probably makes you ineligible.

There are two exceptions:

If you provide day care services for children, older adults (65 or above) or handicapped individuals in that part of the house, as long as you have a license, certification or approval as a day care center under state law.

If you use the office for storage of inventory or product samples you sell in your business

Principal place of business

Although your home office doesn’t have to be the only place you meet your clients or customers, it must be your principal place of business. That means you use the space exclusively and regularly for administrative or management activities, such as billing customers, setting up appointments and keeping books and records

Can I take the home office deduction as a work-from-home employee?

W-2 employees who work from home are not able to take the home office tax deduction. If you are a freelancer, have a side hustle, or run your own business in addition to your W-2 job, you may be able to take the home office deduction. Talk with a qualified financial professional.

» Need some help? How to find a CPA near you

How to calculate your home office tax deduction

You can determine the value of your home office deduction using one of two methods.

Simplified method: With the simplified option, you aren’t deducting actual expenses. Instead, the square footage of your space is multiplied by a prescribed rate. The rate is $5 per square foot for up to 300 square feet of space

Actual expenses method: The regular, more difficult method values your home office by measuring actual expenditures against your overall residence expenses. You can deduct mortgage interest, taxes, maintenance and repairs, insurance, utilities and other expenses

» MORE: See our picks for this year's best tax software

Simplified version vs. actual expense deduction

The choice of whether to use the simplified deduction, if you’re eligible for it, or to deduct actual expenses, depends mainly on which would net you the bigger tax deduction.

The actual expense method

If you use the actual expenses method, you can deduct direct expenses — such as painting or repairs solely in the home office — in full. Indirect expenses — mortgage interest, insurance, home utilities, real estate taxes and general home repairs — are deductible based on the percentage of your home used for business

Example: Let’s say you paid $3,000 in mortgage interest, $1,000 in insurance and $3,000 in utilities (all indirect expenses) plus $500 on a home office paint job (direct expense) during the year. Your home office takes up 300 square feet in a 2,000-square-foot home, so you may be eligible to deduct indirect expenses on 15% of your home.

That could mean a deduction of $1,050 in indirect expenses ($7,000 in expenses, multiplied by the 15% of space used in the home), plus $500 for the direct expense of painting the home office, for a total deduction of $1,550.

The simplified version

If your home office is 300 square feet or less, and you opt to take the simplified deduction, the IRS gives you a deduction of $5 per square foot of your home that is used for business, up to a maximum of $1,500 for a 300-square-foot space

In this case, using the simplified method could make more sense because you’d get only $50 more in deductions by documenting actual expenses. You should also consider the time it will take you to gather receipts and records.

The simplified method can work well for single-room offices and small operations. The actual expenses method might work better if the business makes up a large part of the home.

Other home office deduction rules and considerations

Receipts. If you plan on deducting actual expenses, keep detailed records of all the business expenses you think you’ll deduct, such as receipts for equipment purchases, electric bills, utility bills and repairs. If you’re ever audited by the IRS, you’ll be prepared to back up your claims.

Home sales. If you're a homeowner, the actual expenses method could affect your ability to avoid capital gains tax on home sales. Be sure to consult with a qualified financial advisor or tax pro. People who sell their primary residence after living in it for at least two of the five years before the sale generally don't have to pay taxes on up to $250,000 in profit on the sale, or $500,000 if married filing jointly

Depreciation. If you use the actual expenses method, you’re required to depreciate the value of your home for tax purposes. This reduces the cost basis of your home, which means that if you sell your home later, you may have to pay capital gains tax on some or more of the profits from the sale. If you use the simplified method, depreciation isn't a factor and thus may reduce your chances of having to pay capital gains tax on some or more of the profits from the sale of your home later

The rules on home office tax deductions can be hard to digest. Consider consulting with a financial advisor or using the appropriate online tax software if you're unsure about how to proceed.

Helpful resources