The Home Office Deduction

Working from home turns part of your rent or mortgage, utilities and insurance into a business cost, but only for some people and only if the space passes strict tests. The rules are among the most misunderstood in the tax code: many remote employees assume they qualify and do not, while many freelancers who do qualify skip the deduction because they believe it invites an audit. This chapter explains who can claim it in 2026, the two tests the space must meet, the two ways to calculate it, and the trade-off between them that shows up only when you sell your home.

Who can claim it, and who cannot

The home office deduction is for the self-employed: sole proprietors, independent contractors, single-member LLC owners and partners who use part of their home for their business. It is claimed on the business return, Schedule C for most people, so it lowers both income tax and self-employment tax.

Employees cannot claim it on their federal return, even if their employer requires them to work from home. The deduction for unreimbursed employee expenses was suspended in 2018, and the 2025 law made that permanent. An employee's route is to ask the employer to reimburse home office costs under an accountable plan; reimbursements made that way are not taxable income. A few states still allow employee expense deductions on the state return.

Someone with a salaried job and a side business can claim the deduction for the side business, if the space qualifies for that business.

The two tests the space must pass

Regular and exclusive use. The area must be used regularly, and only, for business. A desk in the corner of a guest room counts if that corner is used for nothing else; the kitchen table where you also eat does not. The space does not need walls, but it must be a separately identifiable area. Occasional personal use, like a family member using the computer for homework, can disqualify it. Two exceptions skip the exclusive-use rule: space used to store inventory or product samples for a business that sells products, and space used for a licensed daycare.

Principal place of business, or one of a few alternatives. The home office must be your principal place of business. It qualifies if you do most of your work there, or if you use it for administrative and management work (billing, scheduling, bookkeeping) and have no other fixed location where you do substantial amounts of that work. A plumber who works at customers' homes and does the paperwork in a home office qualifies. The space can also qualify if you regularly meet clients or customers there in person, or if it is a separate structure, like a detached studio or garage, used for the business.

Method one: the simplified method

The simplified method multiplies the square footage of your office by $5 per square foot, on up to 300 square feet, for a top deduction of $1,500. You do not track home expenses or claim depreciation, and you still deduct mortgage interest and property tax in full on Schedule A if you itemize, since none of it is allocated to the business.

A single freelancer with $60,000 of profit owes $5,020 in income tax. Claiming the largest simplified deduction, $1,500, brings profit to $58,500 and income tax to $4,840. Self-employment tax falls too, by about 14.1% of the deduction, because the deduction comes off business profit.

Method two: the regular method

The regular method, filed on Form 8829, uses your real costs. You divide them into two kinds.

• Direct expenses are for the office alone: painting it, repairing it, furniture for it. They are deductible in full.
• Indirect expenses are for the whole home: rent, mortgage interest, property tax, homeowner's or renter's insurance, utilities, general repairs, security, HOA dues, and depreciation of the house itself (not the land). These are deductible at your business percentage, usually the office's square feet divided by the home's.

An office that takes up 15% of the home's floor area makes 15% of the indirect costs deductible. For a renter in a high-rent city, or for an office larger than 300 square feet, the regular method can produce a much larger deduction than the simplified one.

If the regular method brought the same freelancer's profit down to $54,000, income tax would be $4,300, against $4,840 with the simplified method and $5,020 with no deduction. Whether your numbers look like that depends mostly on your rent or home costs and the size of the office, so work out both before choosing.

The trade-offs between the methods

Paperwork. The simplified method needs only a measurement and proof that the space qualifies. The regular method needs a record of every home cost for the year.

Income limit and carryover. Under both methods, the deduction cannot exceed the business's gross income minus its other expenses; it cannot create a business loss. Under the regular method, the disallowed part carries forward to future years. Under the simplified method, it is lost.

Depreciation and the sale of your home. This is the hidden one. The regular method for a homeowner includes depreciation of the business part of the house. When you later sell, the depreciation you took (or could have taken) is taxed as unrecaptured section 1250 gain at a rate of up to 25%, even if the rest of your gain is excluded under the home sale exclusion. The simplified method claims no depreciation, so there is nothing to recapture. For a renter this does not arise.

Switching. You can choose either method each year. If you move from simplified back to regular, depreciation for the later year is calculated with a special table described in IRS Publication 587.

Homeowners in particular should weigh the larger yearly deduction of the regular method against the tax on depreciation at sale. Renters usually just pick the larger figure.

Records to keep

• A floor plan or sketch with measurements of the office and the whole home, and dated photos showing the space set up for work and nothing else.
• Evidence of regular business use: client meetings scheduled there, work done there, mail addressed to the business at home.
• For the regular method, a full year of bills for rent or mortgage interest, utilities, insurance and repairs, and the purchase price and improvements for depreciation.
• Keep these for as long as you own the home, since they support the depreciation you report when you sell.