Home office depreciation is calculated by taking the lower of your home’s adjusted basis or its fair market value on the day business use began, subtracting the land portion, multiplying by your business use percentage, and dividing by 27.5 years. That yearly figure comes off your business income. The catch: every dollar you depreciate becomes taxable when you sell, at a rate up to 25%, and the IRS will treat you as if you claimed it even if you didn’t.
The Core Formula
The IRS treats the business portion of your home as residential rental property under MACRS, which means a 27.5-year straight-line recovery period.1Internal Revenue Service. Publication 527 – Residential Rental Property Three inputs drive the calculation:
- The depreciable basis of the structure (land already stripped out)
- Your business use percentage
- The 27.5-year recovery period
Multiply the first two, divide by 27.5, and that is your annual deduction. A worked example: suppose you paid $400,000 for the home. Your property tax assessment allocates 80% of value to the structure and 20% to land, giving a structure basis of $320,000. Your office measures 200 square feet in a 2,000-square-foot home, so your business use percentage is 10%. The business portion of the structure is $32,000. Divide by 27.5 and you get $1,163.64 per year.
The Mid-Month Convention in Year One
You do not get a full year’s depreciation the year you start. The IRS applies a mid-month convention: whatever day of the month you began business use, you are treated as starting at that month’s midpoint.1Internal Revenue Service. Publication 527 – Residential Rental Property Start in March and you get 9.5 months of depreciation that year, not twelve. IRS Publication 946’s Table A-6 lists the first-year percentage for each starting month so you can multiply and be done with it. After year one, you claim the full annual amount until the year you stop using the space, when the mid-month rule applies again.
Figuring the Depreciable Basis
Basis is where taxpayers make expensive mistakes. Inflate it and you overstate the deduction; understate it and you leave money on the table.
Homes You Bought
Compare two figures: your adjusted basis (purchase price plus any permanent improvements made before business use began) and the home’s fair market value on the day you started using the space for business. Your depreciable basis is the lower of the two.2Internal Revenue Service. Publication 551 – Basis of Assets
Then remove land value, because land does not wear out and cannot be depreciated. The simplest defensible method is applying the land-to-building ratio from your local property tax assessment.3Internal Revenue Service. Depreciation FAQs If the assessment splits value 80/20 between structure and land, use that same ratio on your basis.
Homes You Inherited or Received as Gifts
Inherited property starts with a basis equal to fair market value at the decedent’s date of death, or the alternate valuation date if the estate elected it. When you later convert that home to business use, the depreciable basis is the lesser of the FMV on the conversion date or your adjusted basis on that date.2Internal Revenue Service. Publication 551 – Basis of Assets
Gifted homes carry the donor’s basis when the FMV at the time of the gift was at or above that basis (increased by any gift tax the donor paid on the net appreciation). For depreciation purposes, use the donor’s adjusted basis, then compare against FMV at the conversion date and take the lower figure, and strip out land as usual.4Internal Revenue Service. Property (Basis, Sale of Home, Etc.)
Setting Your Business Use Percentage
The IRS accepts any reasonable method. Two dominate: square footage and room count.5Internal Revenue Service. Publication 587 – Business Use of Your Home Square footage divides office area by total finished home area. Room count divides business rooms by total rooms, which only holds up when rooms are similar in size. Square footage is the more defensible number for most taxpayers.
Improvements Versus Repairs
A capital improvement made after business use begins, like a new roof, HVAC replacement, or a room addition, does not get folded into your original schedule. Each improvement gets its own 27.5-year clock starting the month it was placed in service. A $10,000 roof at a 10% business allocation adds about $36.36 per year ($1,000 รท 27.5).
Routine maintenance is different. Painting, patching drywall, clearing a drain: these are current-year expenses, allocated by your business use percentage. Miscategorizing a repair as an improvement spreads a deduction you could have taken now across nearly three decades.
What Depreciation Costs You When You Sell
Every dollar you depreciate reduces your home’s basis, which increases your gain at sale. That portion of the gain, called unrecaptured Section 1250 gain, is taxed at a maximum rate of 25%, higher than the 0%, 15%, or 20% long-term capital gains rates that apply to the rest of your profit.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses
The Section 121 exclusion (up to $250,000 of gain, or $500,000 for joint filers) does not shelter this depreciation.7Internal Revenue Service. Publication 523 – Selling Your Home Sell with a $300,000 gain after claiming $10,000 in home office depreciation, and that $10,000 is taxed at up to 25% regardless of the exclusion. You report the business portion of the sale on Form 4797, Part III, which calculates the recapture.8Internal Revenue Service. Instructions for Form 4797
Allowed or Allowable: You Can’t Skip Depreciation to Dodge Recapture
This is the rule that traps taxpayers who thought they were being cautious. The tax code requires you to reduce your home’s basis by the greater of the depreciation you actually claimed or the depreciation you were entitled to claim.9Internal Revenue Service. Depreciation and Recapture Qualify for ten years of home office depreciation, claim none of it, and you still owe recapture tax on the full amount you should have deducted. You get nothing on the front end and pay just as much on the back end. If you qualify, claim it.
The Simplified Method as an Alternative
The IRS offers a simplified option: $5 per square foot of home office space, capped at 300 square feet, for a maximum deduction of $1,500 per year. You report it directly on Schedule C and skip Form 8829.10Internal Revenue Service. Simplified Option for Home Office Deduction
The real appeal is not the arithmetic. Under the simplified method, depreciation is treated as zero, so there is no recapture liability at sale for years you used it.10Internal Revenue Service. Simplified Option for Home Office Deduction For a small office in a modest home, the numbers can come out close to the regular method without the long tail. You can switch between the two from year to year, but any year you take the simplified deduction, you forgo actual depreciation for that year, and disallowed expenses do not carry over under the simplified approach.11Internal Revenue Service. Topic No. 509, Business Use of Home
Reporting on Form 8829
Under the regular method, depreciation lives in Part III of Form 8829. The form also calculates your business use percentage, allocates direct and indirect expenses, and applies the income limit in Part II. The final number flows to Schedule C.12Internal Revenue Service. Instructions for Form 8829 – Expenses for Business Use of Your Home
The income limit matters: your total home office deduction cannot exceed the gross income from the business using the space. If freelance income for the year is $8,000 and home office expenses total $10,000, you deduct $8,000 and carry the $2,000 forward, where it faces the same test next year.13Internal Revenue Service. Form 8829 – Expenses for Business Use of Your Home Depreciation sits at the bottom of the deduction order on Form 8829, so it is the first thing pushed to carryover when the limit bites. The carryover does not expire but is only usable against future income from the same business.
Who Can Claim It
Two tests gate the whole deduction. First, the space must be used exclusively and regularly for business. A spare bedroom that hosts weekend guests fails. Second, the home must be your principal place of business or a place where you regularly meet clients; a detached structure has a lower bar and only needs to be used in connection with the business, though exclusive and regular use still applies.14Office of the Law Revision Counsel. 26 U.S. Code 280A – Disallowance of Certain Expenses in Connection With Business Use of Home, Rental of Vacation Homes, Etc.
One boundary worth stating plainly: if you are an employee rather than self-employed, you cannot claim this deduction for tax years 2018 through 2025. The Tax Cuts and Jobs Act suspended miscellaneous itemized deductions, which is where the employee version lived. That suspension expires at the end of 2025, so employees who itemize can claim it again starting with the 2026 tax year, subject to the 2%-of-AGI floor on unreimbursed employee expenses.15Library of Congress. Expiring Provisions in the Tax Cuts and Jobs Act (TCJA, P.L. 115-97) Self-employed individuals and sole proprietors are the group this deduction is built for.