40.13 What Home Office Expenses Are Deductible?

For a qualifying home office (40.12), deductible costs may include real estate taxes, mortgage interest, operating expenses (such as home insurance premiums and utility costs), and depreciation allocated to the area used for business. The deduction figured on Form 8829 may not exceed the net income derived from the business (40.15).

The deduction from Form 8829 is entered on Line 30 of Schedule C.

Expenses that affect only the business part of your home, such as repairs or painting of the home office only, are entered on Form 8829 as “direct” expenses. Expenses for running the entire home, including mortgage interest, taxes, utilities, and insurance, are deductible as “indirect” expenses to the extent of your business-use percentage (40.14).

Household expenses and repairs that do not benefit the office space are not deductible. However, a pro rata share of the cost of painting the outside of a house or repairing a roof is deductible. Costs of lawn care and landscaping are not deductible.

If you install a security system for all your home’s windows and doors, the portion of your monthly maintenance fee that is allocable to the office area is a deductible operating expense. Furthermore, the business portion of your cost for the system is depreciable. Thus, if the office takes up 20% of your home (40.14) you may deduct, subject to an income limitation (40.15), 20% of the maintenance fee and a depreciation deduction for 20% of the cost.

Filing Instruction

When To Figure Depreciation on a Home Office Using 27.5 Year Recovery

While depreciation of a home office usually is figured using a 39-year recovery period, a 27.5 year recovery period can be used 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 rental income is rental income from dwelling units within the building. In applying the 80% test, the rental value of the entire landlord’s unit is treated as gross rental income and the rental value of the landlord’s residential space (but not the home office) is treated as rental income from a dwelling unit.

For example, where a landlord lived in one unit of his eight-unit building and used a room in his unit for a home office, the IRS allowed the home office to be depreciated over 27.5 years as residential rental property.

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Figuring depreciation.

Even though a home is a residence, depreciation on a home office usually is figured as if it were commercial property using a 39-year recovery period (see Table 40-2). For depreciation purposes, the cost basis of the house is the lower of the fair market value of the house at the time you started to use a part of it for business or its adjusted basis, exclusive of the land. Only that part of the cost basis allocated to the office is depreciable. Form 8829 has a special section, Part III, for making this computation.