IRS and state tax authorities allow taxpayers to deduct expenses for areas of their home used exclusively for a home office. But there are downsides and risks to taking the deduction. Those disadvantages include:
- Part of the sales price of the home may eventually become taxable (most home sales are otherwise non-taxable)
- Detailed accounting records and calculations are required to be maintained for the entire period of home ownership
- Taxpayer must reveal details of their personal residence that they might otherwise consider to be private information
Fortunately there is an easier option. Federal tax law allows a safe harbor method of calculating a home office deduction that avoids all of these potential problems.
One of the primary advantages for using the safe harbor method of calculating home office deduction is that it avoids the issue that accounts refer to as “Section 1250 recapture”. If you choose to use this safe harbor method every year then there is no reason to keep records of allowable home depreciation for taxable recapture. This translates to a savings of record-keeping and income tax filings costs.
The allowable safe harbor deduction is $5 per square foot which works out to a deduction of about $600 to $1500 per year for a typical room that people tend to use for a home office. Use of this method does not restrict taxpayers from deducting other business expenses that would have been allowed without regard to the issue of the home office deduction. For example, the cost of installing a T1 business internet line would be deducible in addition to the safe harbor home office deduction.
When you consider the total savings in terms of accounting time and other benefits, I think that usually outweighs the benefits of the other method. In addition to the accounting and recapture benefits of this method, I find that taxpayers also like the fact that they don’t need to disclose information about their personal residence that they consider to be more private than their business transactions.
Legal authority for this tax position comes from Internal Revenue Procedure 2013-13.