The spare bedroom with the desk in it.
Also the guest bed, the treadmill and the Christmas decorations.
That is the whole problem, in one room.
Welcome. We’re glad to serve you.
If you run a business from home, part of your rent or mortgage interest, your utilities, your insurance and your repairs is a business expense, and so is depreciation on the part of the house the business uses. The deduction is real, it is worth a few hundred to a few thousand dollars a year, and it has survived decades of audits because the rule is narrow and clear: the space has to be used exclusively and regularly for the business, and it has to be your principal place of business or a place you meet clients.
Two things changed the landscape. In 2018 the deduction for employees went away, and the 2025 act made that permanent, so the forty million people who worked from home for an employer get nothing. And the IRS added a simplified method, $5 a square foot, that removes most of the recordkeeping and most of the audit risk. Below is who qualifies, how both methods work, and the part people forget: the depreciation comes back when you sell.
Self-employed people filing Schedule C: yes, on Form 8829 or by the simplified method. Partners in a partnership: yes, as an unreimbursed partnership expense, if the partnership agreement requires them to pay their own. S corporation owners: not directly, but through a reimbursement from the corporation, described below. Farmers on Schedule F: yes. Landlords managing their own rentals: generally no, unless the rental activity is a trade or business, which is rare.
Employees: no. The deduction for unreimbursed employee expenses was suspended in 2018 and is now permanently gone. If your employer sends you home to work, the only route is for the employer to reimburse you under an accountable plan, which is tax-free to you and deductible to them. Many employers won’t; it is worth asking. A W-2 employee who also has a side business can take the deduction for the side business, for space used exclusively for it, not for the day job.
↑ Back to topExclusive use means the space is used only for the business. A room that is an office by day and a guest room by week is not exclusive. The treadmill in the corner, the kids’ homework at the desk, the family computer: any of them fails it. The space doesn’t have to be a whole room; a clearly defined area of a room qualifies if nothing else happens there. A desk in the living room does not. Two exceptions: inventory or product samples stored at home for a retail or wholesale business, and a licensed daycare run in the home, which uses a time-based allocation instead.
Regular use means ongoing, not occasional. A few hours a week every week is regular; a project last March is not.
Principal place of business means one of three things: it is where you do most of the work; or it is where you do the administrative and management work (billing, scheduling, books) and you have no other fixed location where you do that; or it is where you regularly meet clients or patients. The second one is the broad door. A contractor who works at job sites all day and does the estimates and invoices at the home office qualifies, because the sites aren’t a fixed location for administration. A physician with a hospital office who also does charting at home does not, because the hospital office is a fixed location for it.
A separate structure, a detached garage or studio, needs only to be used exclusively and regularly for the business; it doesn’t have to be the principal place.
↑ Back to top$5 per square foot, up to 300 square feet, maximum $1,500 a year. No Form 8829, no allocation of utilities, no depreciation, nothing to recapture when you sell. Mortgage interest and property taxes stay entirely on Schedule A if you itemize. You can switch between methods from year to year, but a year on the simplified method gets no depreciation and no carryover of a prior year’s disallowed expenses.
It is the right choice for most people with a small office, a modest mortgage, and no appetite for a depreciation schedule. It is the wrong choice for a large office in an expensive house, where the regular method might produce $4,000 or $5,000. The arithmetic is quick and we run both.
↑ Back to topMeasure the office and the house; the ratio is the business percentage. A 200-square-foot office in a 2,000-square-foot house is 10%. That percentage of the indirect expenses, mortgage interest, property taxes, homeowner’s insurance, utilities, HOA dues, general repairs, security, is deductible. Direct expenses, things done only to the office like painting it or a dedicated phone line, are 100%. The other 90% of interest and taxes goes to Schedule A.
Then depreciation: 10% of the house’s cost (not the land), over 39 years, because the office is nonresidential property. On a $400,000 house with $90,000 of land value, that is $31,000 of depreciable basis for the office and about $795 a year. It is not optional. If you don’t claim it, the IRS still treats it as taken when you sell. Which brings us to the sale.
↑ Back to topThe home office deduction cannot create or increase a loss from the business. It is limited to the net income of the business before the home office, after the business’s other expenses. The order is fixed: mortgage interest and taxes first (these are allowed regardless, since they’d be deductible anyway), then operating expenses, then depreciation. Whatever is disallowed carries forward to a later year with enough income, under the regular method only. A new business with $3,000 of profit and $6,000 of home office expense deducts $3,000 and carries $3,000.
↑ Back to topGood news first. If the office is inside your home (a room, a basement, a converted bedroom), the $250,000/$500,000 home-sale exclusion covers the whole house, office included. You don’t allocate the gain between the office and the residence. The only thing taxed is the depreciation you took, or should have taken, after May 6, 1997, at a rate of up to 25%. Ten years of $795 is $7,950 of depreciation, so about $2,000 of tax at sale on a house that otherwise sold tax-free. The simplified method, with no depreciation, has nothing to recapture.
If the office is a separate structure, that part of the property is not covered by the exclusion at all, and its share of the gain is taxed as business property. The detached studio costs more at sale than it saved along the way, unless the business income is substantial.
The room saved me about $900 a year for a decade. Then the house sold and the IRS wanted $2,000 of it back, with interest in the form of my time. I’d still do it. Barely.
↑ Back to topAn S corporation shareholder is an employee of the corporation, and employees can’t deduct home offices. The fix is for the corporation to reimburse you for the office under a written accountable plan: you submit the calculation (the same percentage of the same expenses, including depreciation, that Form 8829 would use), the corporation pays you, the corporation deducts it, and the reimbursement is not income to you. It has to be done during the year, with a written plan and actual payments, not booked at year end as an afterthought. We set these up; the document is two pages.
Renting your office to your own corporation does not work. The rent is income to you, the expenses against it are not deductible (Section 280A specifically blocks them), and you end up worse off than with no deduction.
A partner can deduct home office expenses on Schedule E as unreimbursed partnership expenses, but only if the partnership agreement requires partners to pay those expenses personally. If the agreement is silent, amend it before year end.
↑ Back to topSchedule C profit before the home office: $58,000. House bought for $410,000, land $85,000. Annual: mortgage interest $14,000, property taxes $2,900, insurance $1,800, utilities $3,600, HOA $1,200, repairs $900.
Simplified: 180 × $5 = $900.
Regular: 10% of $24,400 of indirect expenses = $2,440, plus depreciation of ($325,000 × 10%) ÷ 39 = $833. Total $3,273. The other 90% of interest and taxes stays on Schedule A, though with the $32,200 standard deduction she doesn’t itemize anyway.
Difference: $2,373 more deduction under the regular method, worth about $700 in federal and Colorado income tax plus about $335 in self-employment tax, since the home office deduction does reduce SE income. Cost: a Form 8829 and $833 a year of depreciation to be recaptured at sale, roughly $210 of tax per year of ownership at 25%. The regular method wins while she owns the house; the gap narrows at sale. We would take the regular method and keep the schedule.
Colorado has no separate home office rules. The deduction reduces Schedule C profit, which reduces federal taxable income, which is where the Colorado return starts, so it saves 4.40% in Colorado on top of the federal rate and the self-employment tax. Depreciation recapture at sale flows through the same way. Nothing to add, nothing to subtract.
↑ Back to topNo. The deduction for employees ended in 2018 and is now permanent. The only route is for your employer to reimburse you under an accountable plan, which is tax-free to you. Ask; some will.
Yes. Exclusive use means only the business uses the space. A guest bed, even unused most of the year, fails the test for the whole year. Move the bed, or carve out a clearly defined area of the room that is only the office.
Through a written accountable plan: the corporation reimburses you for the business percentage of your home expenses during the year, deducts the reimbursement, and it isn’t income to you. Don’t rent the office to your corporation; that route is blocked.
Only the depreciation is taxed, at up to 25%, and only if the office is inside the home; the home-sale exclusion covers the rest. A detached structure is different: its share of the gain is not excluded. The simplified method has no depreciation and nothing to recapture.
For the Tax Shop desk · forms, code sections, and the things that get missed
If the room is only an office, take the deduction; it is one of the few in the code that is both legitimate and easy to document. Measure the room, pick the method, and keep the schedule. If the room is sometimes something else, make it only an office or skip the deduction; the exclusivity test is where this one is lost. S corporation owners: set up the accountable plan now, not in April. And when the house sells, bring the old 8829s, because the depreciation is coming back whether or not anyone wrote it down.
Call 303-734-1040 or stop by the office in Lone Tree. We’ve been reading the footnotes for Douglas County and the Denver area since 1969.
Figures reflect the 2026 tax year as currently published and are rounded for readability. Items marked (verify) are to be confirmed against IRS or Colorado DOR sources before the figures freeze in December. Last updated October 15, 2026.
