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 because under the IRS rule, the home office is treated as if it were a commercial property using a 39 year recovery period.
Home office 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 Depreciation Conditions
To claim deprecation for your home office, you must meet ALL three of the following conditions:
- 1. Principal place of business.
- 2. Regular and exclusive use.
- 3. Gross income requirement.
Visit the “home business tax deductions” section of our website for an overview of the above conditions.
Determining Home Office 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.
Determine Home Business Percentage Use
There are several ways to determine the business percentage use of your home for home office depreciation. 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.
- 1. Divide the area (length multiplied by the width) used for business by the total area of your home.
Home office business percentage use example 1: You determine you have a home office that is 200 square feet (20 feet x 10 feet). Your home is 1600 sq feet. Your business percentage use is 12.5% (200 sq feet / 1600 sq feet).
- 2. If the rooms of your house are all about the same size, you can divide the number of rooms used for business by the total number of rooms in your home.
Home office business percentage use example 2: You use one room in your house for your business. Your house has 4 rooms all about equal size. Your office is 25% (1/4) of the total area of your home. Your business percentage is 25%. Be aware that you might not be allowed to use this method if the percentage you determine is greater than what you would get using the square footage method. You should only use this method if all the rooms in your house are approximately the same size.
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 repairs and improvements, 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 Detailed 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 2014. 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 for the home office depreciation amount. 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 2014. 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%).
MACRS – Nonresidential Real Property (39 years) Chart: The column is used to determine which month the property is placed into service.
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.
Home office depreciation is almost always calculated using a 39 year recovery period. A 27.5 year recovery period can be used for home office depreciation 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.
For more information regarding Home Office Depreciation, visit the IRS website.