what percentage of your home you use for business?

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Real Estate Agent with Re/Max All Properties New Lenox Illinois

What You Can and Can't Deduct When You Work From Home

Working from home can offer many advantages including tax deductions. Just take care what you try to write off for your home office on your return says Donna Fuscaldo.

Passing the IRS litmus test

To meet IRS guidelines, your home office must be your principal place of business, or the place you see clients in the normal course of business. Parts of your home you use to store products or equipment for your business also count. That doesn't mean that all your work has to be done from home. If you're an outside salesperson, you probably spend most of your work time elsewhere. But if you do you billing and return customer calls primarily from your home, your home office should qualify.

You can also qualify for the deduction if your employer requires you to work from home, as long as you don't charge your employer rent. One big catch is that you must maintain the at-home office for your employer’s convenience, not your own, such as to complete reports at night or on weekends. Self-employed workers use IRS Form 8829 to calculate the deduction, which they list on Schedule C.

Measuring your home office

The amount you can deduct for your home office depends on the percentage of your home used for business. Your work space doesn't need to be a separate room—a table in a corner qualifies. But it has to be an area that's used solely for business. The tax break also covers separate structures on your property, like a detached garage you've converted to an office. Unlike an office inside your home, a separate structure doesn't have to be your main place of business to qualify for a deduction. That's because the IRS believes your family is less likely to use a separate structure as a part-time play area or den, says Mark Luscombe, principal analyst for tax and consulting at CCH. 

To calculate what percentage of your house the home office occupies, divide your home office's square footage by the total square footage of your home. If your home is 3,000 square feet and your office is 150 square feet, for example, you'd use 5% to calculate your deductions. Not sure how big your house is? Check the documents you received when you bought your home—there's probably a detailed rendering—or measure the outside of your home and multiply length times width.

What can you deduct? 

Once you've figured out what percentage of your home you use for business, you can apply that percentage to different home expenses. These include:

  • Mortgage interest
  • Real estate taxes
  • Utilities (heating, cooling, lights)
  • Home repairs and maintenance (painting, cleaning service)
  • Home owners insurance premiums

Just take each expense and multiply it by your home office percentage (the 5% mentioned above). That's the amount you can deduct as a business expense. So if you spend $150 a month on electricity, you can deduct $7.50 as a business expense. That adds up to a $90 deduction per tax year.

Save bills or cancelled checks to prove what you spent in case of an IRS audit. Take an hour a week to file them away. Also, only repairs can be expensed; improvements must be depreciated.

Don't forget depreciation

Depreciation is based on the idea that everything—even something like a home—wears out eventually. To figure home office depreciation, start by calculating the tax basis of your home: generally the purchase price plus the cost of improvements, minus the value of the land it sits on. Next, multiply the tax basis by the percentage of your home used for work. This gives you the tax basis for your home office.

Usually, depreciation deductions for a home office are figured over a 39-year period. There are caveats. For a crash course, read IRS Publication 946 or talk to a tax pro. 

Keep in mind that depreciation deductions on your home office increase the amount of profit on a home sale that is subject to taxes. There’s an exclusion of $250,000 of profit if you’re a single filer, $500,000 for joint filers. Consult with a qualified tax professional on how depreciation deductions affect your tax liability when you sell.

This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice; tax laws may vary by jurisdiction.

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Re-Blogged 1 time:

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  1. David Farrell 03/22/2012 09:33 PM
Topic:
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Location:
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what percentage of your home you use for business

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Rainmaker
848,742
Winston Heverly
Winston Realty, Inc. - Atlantis, FL
GRI, ABR, SFR, CDPE, CIAS, PA

Your office may be 5%, but don't forget about the use of the other areas, like kitchen, waiting room, lobby etc.

Mar 22, 2012 09:14 PM #1
Rainmaker
883,064
Tim Lorenz
TIM LORENZ - Elite Home Sales Team - Mission Viejo, CA
949 874-2247

I know and did pass the test.  I was audited and came away with no additional taxes.

Mar 22, 2012 09:16 PM #2
Ambassador
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Praful Thakkar
Keller Williams Realty - Andover, MA
Andover, MA: Andover Luxury Homes For Sale

Dale, I do use my home office a lot - and fortunately, TurboTax does lots of calculations for me...

Mar 22, 2012 09:19 PM #3
Rainer
161,476
David Farrell
David V. Farrell Co. - Garden City, NY
Licensed NY State Real Estate Broker

I hit the 'suggest' button the seond I saw your article.  My dad taught me how to file tax returns and he always said, "In the future, I don''t care if you use your entire house as an office and your kids sleep in the garage - don't ever file that your house is an office."

As a lawyer, he had seen enough clients come to him who had give the home write-off a try and lost.

 

He used to also use a term "E and T and home by three" which implied the agents searched for Travel and Entertainment and they could be done by 3 p.m.

 

Mar 22, 2012 09:28 PM #4
Rainmaker
206,331
Bruce Hicks
Best Homes Hawaii - Honolulu, HI
CRS- Your Friend/Helper for Lifetime! 808.9551577

I've always been afraid to use my home office tax deduction.  We are a two person business, have an office in town that I share with a tax preparer but do 80% of my business from my home office.  It's one of our spare bedrooms.  Problem is we also use them for home storage things, like reading news, watching net flix etc and a lot of it is not physically separate.

Mar 22, 2012 09:29 PM #5
Rainmaker
1,287,307
John Pusa
Sellstate Pacific Realty - Glendale, CA
Your All Time Realtor With Exceptional Service
Dale - Thank you for sharing detailed quality information on what percentage of your home you use for business.
Mar 22, 2012 09:49 PM #6
Rainmaker
155,484
Dale Taylor
Re/Max All Properties New Lenox Illinois - Frankfort, IL
Realtor = Chicago Illinois Homes Townhomes Condos

I so appreciate all of your comments.  Wishing you a 2012 filled with great health and unexpected income for each of you!

Mar 22, 2012 10:22 PM #7
Rainmaker
155,484
Dale Taylor
Re/Max All Properties New Lenox Illinois - Frankfort, IL
Realtor = Chicago Illinois Homes Townhomes Condos

Tim, I've been through a couple of audits as well.  What a blessing when you keep very good records and do the right thing!  Integrity always wins!

Mar 22, 2012 10:25 PM #8
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Rainmaker
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Dale Taylor

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