Home Office Deduction

The deduction method you choose matters especially when it comes to the yearly home office depreciation deduction. Depreciation allows for your property’s decrease in value due to normal wear and tear. If you claim home office expenses using the actual expense method, you deduct depreciation if you have a profit. Under the safe harbor method, you don’t.

The method you use also affects your tax situation when you sell the home:

• If you used the actual expense method to claim home office expenses, you’ll owe taxes on all the depreciation you’ve deducted or could have deducted if you had a profit. This is called “recapture of depreciation,” and you can’t exclude it from taxes.
• If you used the safe harbor method to claim home office expenses, you don’t deduct depreciation. So, when you sell, you won’t owe taxes on any depreciation.
• Things get more complicated if you’ve switched methods from year to year. In that case, you’ll have to recapture depreciation for any years when you claimed actual expenses, even if you’re using the safe harbor method at the sale. Switching between the safe harbor and actual expense methods requires special calculations of depreciation, so it’s a good idea to consult a tax and accounting advisor for help.