Home Office Depreciation Deduction

If you meet the requirements for a home office for your home
business and use a portion of your residence "regularly" and
"exclusively" for business purposes, you can claim a home office
depreciation deduction.





If you claim a home office depreciation deduction, you can
depreciate a portion of your home because the portion of your
residence used as a home office is a depreciable business asset. 
This means that you can take the home office portion of your
residence and deduct the cost over 39 years.

Depreciation is an allowance for the wear and tear on the part of
your home used for business.  You cannot depreciate the cost or
value of the land.  You recover the cost of the land when you sell
or otherwise dispose of the property. 

Home Office Conditions
To claim deprecation for your home office, you must meet ALL
three of the following conditions:
 

Principal place of business. Regular and exclusive use. Gross income requirement.

Visit the "home business" section of our website for an overview of the
above conditions.

Figuring Depreciation
Before you figure your depreciation deduction, you need to know
the following information:
 

The month and year you started using your home for business. The adjusted basis and fair market value of your home (excluding land) at the time you began using it for business. The cost of any improvements before and after you began using the property for business. The percentage of your home used for business.

These points are covered in depth below.

Determine Business Percentage Use
There are several ways to determine the business percentage use
of your home.  The IRS allows you to use any reasonable method to
determine the business percentage.  The following two are the most
commonly used methods for figuring the business percentage.  The
first method is to divide the number of rooms used for business by the
total number of rooms in your house.  The second method looks at the
square footage of the place of business, divided by the total square
footage of the house.

Adjusted Basis of Home
Now that you know the business percentage of you home, you need
to determine the adjusted basis of your home at the time you began
using it for business.   The adjusted basis is generally its cost, plus
the cost of any permanent improvements you made to it, minus any
casualty losses or depreciation deducted in earlier tax years. 

Cost of Improvements
You must determine the cost of any improvements before and after you
began using the property for business. 

The cost of permanent improvements increases the tax basis
of your home, while the cost of repairs do not.  For a better overview
of the differences between improvements and repairs, click this link.

Fair Market Value
The fair market value of your home, as defined by the IRS, is the price
at which the property would change hands between a buyer and seller,
neither having to buy or sell, and both having reasonable knowledge of
all necessary facts.  Sales of similar property, on or about the date you
begin using your home for business, may be helpful in figuring the
property's fair market value.

Home Office Depreciation Example
Matt Donnelly paid $350,000 for his home.  If he uses 10% for a home
office, he can deduct $35,000 over 39 years.  Matt began the business
use in March 2011.  Using the depreciation chart for nonresidential
real property, we would multiply the depreciable basis of $35,000 by
2.033% resulting in an amount of $711.55.  Note that the 2.033% is the
amount in the depreciation table for March (column 3) in year 1.  The
$711.55 amount is Matt's depreciation deduction for 2011.  For years 2 -39
Matt will be able to take the full $897.40 amount yearly for depreciation
($35,000 / 39 years) which also can be determined by multiplying the
$35,000 by the 1st month in the depreciation chart for nonresidential
real property ($35,000 x 2.564%).

Depreciating Permanent Improvements
Add the costs of permanent improvements made before you began
using your home for business to the basis of your property.  Depreciate
these costs as part of the cost of your home.  The cost of improvements
made after you begin using your home for business (that affect the
business part of you home, such as a new roof) are depreciated separately.
Multiply the cost of the improvement by the business-use percentage and
depreciate the result over the recovery period that would apply to your
home if you began using it for business at the same time as the
improvement.  For improvements made this year, the recovery period is
39 years.

Using a 27.5 Year Recovery instead of 39 Year Recovery
Depreciation of a home office is almost always calculated using a 39 year
recovery period.  A 27.5 year recovery period can be used however by an
on-site landlord of a building in which at least one dwelling unit is rented out and
80% or more of the gross renal income is rental income from dwelling units
within the building. 

Depreciation Recapture for Home Office
When you sell your home you will need to "recapture" the
depreciation you have recognized.  If you dispose of the property at a
gain, you may have to treat all or part of the gain (even if otherwise
nontaxable) as ordinary income.  Learn about depreciation recapture in
the "depreciation recapture" section of this site.




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