Home Office Deduction

Tax and Money Tip of the Week: 
Home Office Deduction
March 16, 2011 | No. 34

We often hear people say they do not want to take the home office deduction because it is an audit “red flag.”  However, this feeling may lead to missing out on a potentially significant and legitimate deduction.

Let’s look at the rules.  First, the area of the home used for an office must be used regularly and exclusively:

  1. As the principal place of business (including administrative use);
  2. As a place to meet with clients in the normal course of business, or
  3. In connection with the business, if it is a separate structure not attached to the principal residence.
  4. If you are an employee, the business use of the home must be for the convenience of the employer.  (Meaning no other office facility exists and is a condition of employment).  Also, note that the home office deduction will not be as significant as those who are self-employed because the deduction is taken on Schedule A subject to 2% AGI limitations.

If you meet these tests, you can then deduct the business percentage use of:

  • Mortgage Interest
  • Real Estate Taxes
  • Casualty Losses 
  • Home Repairs/Maintenance
  • Rent    
  • Utilities
  • Homeowners Insurance
  • Security Systems
  • Other expenses including garbage removal, snow plowing, etc.
  • Depreciation

Note:  Choosing not to take the depreciation deduction is not an option.  It falls under the “allowed or allowable” rules.  It also means that when you sell your home you must recapture the depreciation.  This means you will have a taxable consequence on what would otherwise probably be a tax-free sale of the home. 

If you should have any questions, please don’t hesitate to give us a call.

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.

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