As a full-time, freelance writer and editor, I work from home. But I’ve never taken a home office deduction on my tax return.
Trust me, I know it’s tempting: Freelancers need every tax break they can get! But my dad, a certified public accountant, has long advised me against it. Plus, the new Tax Cuts and Job Acts of 2017 has placed even more limits on the home office deduction that make it even less palatable.
Not sure if you should take a home office deduction? Here are some of the reasons I’ve refrained—reasons that might speak to your situation, too.
You may no longer qualify
For starters, the home office deduction is now available only to self-employed individuals—this does not include W-2 workers who occasionally work from home. This change actually works in my favor, since I’m a full-time freelancer.
Still, not all full-time freelancers should necessarily take this deduction, because in order to qualify, your space must meet the “exclusive use test.”
“It essentially means the area of your house that you use for the home office can only be used as a home office,” says Mike Slack, lead tax research analyst at the Tax Institute at H&R Block. “Any type of personal use of that room or space will preclude the availability of the deduction. That’s caused a lot of issues, because that can make it hard to satisfy. That’s going to be the one that knocks most people out of being able to claim it.”
This is the provision that had me worried about taking the home office deduction in the past. In the house where I previously lived, my office also doubled as a catch-all room. I used the closet in the room to store my clothes and shoes, and when we had guests, they stayed in the room on an air mattress.
Now, my new home’s office is a designated room used 100% for work, and I likely have a stronger argument for it qualifying for the deduction. Still, there are other reasons I still choose to abstain…
Claiming a home office deduction can be complicated
The IRS allows for two ways of applying the home office deduction: the regular (aka complicated) method and the simplified option.
For the regular/complicated method, a home office is valued by measuring its actual expenses against the overall residence’s expenses. Certain expenses like mortgage interest, taxes, maintenance, repairs, utilities, and depreciation can be deducted. Deductions are based on the percentage of the home devoted to business.
Because the regular method can be complex, the IRS introduced a simplified version in 2013, which established a standard deduction of $5 per square foot of the part of the home used for business, up to 300 square feet. However, the simple method could result in a lower deduction, depending on someone’s total expenses.
“Some people called it a safe harbor,” Slack says. “You’d still have to meet all the requirements for the deduction, but the record keeping would be less.”
Since my home office is only about 110 square feet, the deduction would likely be small—just $550 for the simplified version—and maybe not worth the trouble of the record keeping required.
You have to keep extensive records
This is the area that was the biggest turnoff for me when considering the home office deduction. It has always seemed too time-consuming and just an extra thing to deal with. The work involved felt like too much for the amount of the deduction that I could get.
Plus, I was worried about getting audited. Slack says in the past, the home office deduction was one of the “most highly audited areas of the tax law,” but he sees that changing. Still, if someone were audited, he says, the IRS would most likely recalculate an individual’s taxes without the deduction and impose some penalties and fees.
Homeowners need to keep all records related to the expenses of the home office, including documents for the purchase of the home, utility bills, property tax, insurance, and other records.
“You’re going to have to be able to allocate the purchase price between land and the building itself, and you’re going to also need to know the square footage, the overall square footage and then the square footage of the space you’re using,” Slack says. “So, that can be pretty voluminous.”
You may owe tax on the gain when you sell the home
Another reason that the home office deduction looked less attractive to me is that this deduction could come back and haunt me whenever we decide to sell the house. How? Because while the capital gains (aka profits) on the sale of a home is tax-free if the home is used strictly as a residential space (and is under the $250,000 capital gains cap per individual), things change when part of the home is allocated for business.
Individuals eligible for a home office deduction can claim a tax deduction for depreciation—a tax break to account for the wear and tear on the area of your home used for business. That’s all great, but once you sell, that nice tax break you took is offset by the fact that you have to pay taxes on any capital gains that stem from the sale of your office space. Translation: If 10% of a home’s square footage is designated as a home office, you’d have to pay tax on 10% of any capital gains you enjoy once you sell your home.
If, however, you forgo the home office deduction, the entire gain of a house sale would potentially be tax-free. In many cases, depending on how long you live there, the deprecation tax break taken for a home office could be less than the tax you could owe later on!
Not sure if you should take a home office deduction? Consulting a local tax professional can help determine if it’s right for you, or check out this guide on the home office tax deduction.