Rent or depreciation for business use of your home

If you rent your home, you can deduct the business percentage of your total rent expense. If you do not have to pay for your housing, and the value of the housing is not taxable to you, you cannot deduct the rental value of any portion of the housing. The fair market value of housing could be taxable if, for example, the housing is provided by an employer as part of a compensation package. Otherwise, if you live with family or friends and do not pay rent, you effectively don’t have any rent expense to deduct.

If you own your home, part of the cost for business use is the depreciation on your home, and you can claim this depreciation as a tax deduction. This depreciation is calculated in Part III of Form 8829 or the worksheet. You will need to know your home’s cost or other basis and the fair market value of your home at the time you first started using a portion of your home for business. Depreciation is calculated on the lesser of the cost or other basis, or the fair market value. If your home includes both a building and land, you will need to determine how much of the total value corresponds to the land and how much to the building. Land is not depreciable, but buildings are. You should keep track of the cost or other basis of any permanent improvements made to your home. The cost of these improvements is added to the depreciable basis of the property, and you will need to attach your own schedule showing the cost or other basis of additions and improvements placed in service after you began to use your home for business.

There are charts in the instructions for Form 8829 that indicate the depreciation percentage you should use for your home, based on when you started using your home for business, and when additions or improvements were placed in service. You should complete and attach Form 4562, Depreciation and Amortization, only if you first used your home for business in the current tax year, or if you are depreciating additions and improvements placed in service during the year.

The depreciation you calculate on Form 8829 or on the worksheet is only for your home itself and the additions and improvements. Depreciation on any equipment you use exclusively for your business is reported separately on Schedule C.