Home office deduction: simplified vs regular method

Who can take it

The home office deduction is for self-employed people (Schedule C). The space must be used regularly and exclusively for the business, and it must be your principal place of business, or a place where you meet clients, or a separate structure used for the business. A desk in the corner of the living room that is also used for homework does not meet the exclusive-use test. There are exceptions for storing inventory and for home daycare. W-2 employees cannot deduct a home office on their federal return.

The simplified method

$5 per square foot of office, up to 300 square feet: a maximum of $1,500 a year. No depreciation, no tracking of home costs, and you can still deduct mortgage interest and property tax in full as itemized deductions if you itemize. The deduction cannot be more than the business's gross income minus other expenses, and any amount over that limit is lost, not carried over. If you used the office part of the year, prorate by month.

The regular method (Form 8829)

Work out the business percentage: office square feet ÷ home square feet. Then apply it to the costs of the home:

• Mortgage interest and real estate taxes (or rent)
• Homeowners or renters insurance
• Utilities
• Repairs and maintenance for the whole home
• Depreciation on the business part of the house (not the land), over 39 years

Costs only for the office, like painting that room, count in full. The deduction is limited to the business profit; the excess carries over to the next year.

Example with made-up numbers
Home 1,600 sq ft · office 180 sq ft → 11.25%
Simplified: 180 × 5 = 900
Regular: interest 8,400 + taxes 3,600 + insurance 1,200 + utilities 3,000 + repairs 900 = 17,100 × 11.25% = 1,923.75
+ depreciation 280,000 building basis × 11.25% × 2.564% = 807.66 + 150 direct costs
Regular total: 2,881.41 vs simplified 900

In this example the regular method is more than three times the simplified one, mostly because of mortgage interest, taxes and depreciation. Renters with low rent and small offices often find the gap smaller.

The catch with depreciation

Depreciation claimed (or allowable) on the office reduces your basis in the home. When you sell, that depreciation is generally taxable even if the rest of the gain is excluded under the home sale rules. It is not a reason to avoid the regular method, but it is part of the comparison.

You can switch each year

You can choose either method every year. A common pattern: simplified in a low-profit year, regular when profit is high enough to absorb the larger deduction. If you switch back to the regular method, depreciation uses an optional table; the Form 8829 instructions explain it.

Records to keep

• Floor plan or measurements of the office and the home.
• Photos showing the space used only for work.
• Bills for every home cost you use under the regular method.

Compare both methods with your own numbers in the free home office deduction calculator. For the other deductions on the same form, see the Schedule C deductions list.

General information, not financial, tax or legal advice. Examples use made-up numbers.