Working from home has become increasingly common, and the home office deduction can provide significant tax savings for those who qualify. However, the rules are specific, and claiming this deduction incorrectly can trigger IRS scrutiny. Here's everything you need to know about the home office deduction for 2026.

Who Qualifies for the Home Office Deduction?

The home office deduction is available to self-employed individuals, independent contractors, and small business owners who use part of their home regularly and exclusively for business purposes. The key requirements are:

• Regular and Exclusive Use: The space must be used regularly and exclusively for conducting business. A room or area used for both business and personal purposes doesn't qualify.
• Principal Place of Business: Your home office must be your principal place of business, or a place where you meet clients or customers in the normal course of business, or a separate structure used in connection with your trade or business.

Important Note for Employees: If you're a W-2 employee working from home, you cannot claim the home office deduction, even if your employer requires you to work remotely. The Tax Cuts and Jobs Act eliminated the home office deduction for employees from 2018 through 2025, and this provision remains in effect for 2026.

The Exclusive Use Test

The exclusive use requirement is strict. If you use a room for both business and personal activities, it doesn't qualify—even if you use it for business 90% of the time. However, there are two exceptions:

• Daycare Facilities: If you use part of your home to provide daycare services, you don't need to meet the exclusive use test, though you must meet other requirements.
• Storage of Inventory or Product Samples: If you use space to store inventory or product samples for a wholesale or retail business, you don't need exclusive use if your home is your only fixed business location.

Practical tip: If you work from your kitchen table or use a guest bedroom that also accommodates overnight visitors, that space doesn't qualify for the deduction. Consider designating a specific area or room solely for business use.

Principal Place of Business Test

Your home office qualifies as your principal place of business if:

• You use it exclusively and regularly for administrative or management activities of your business, and
• You have no other fixed location where you conduct substantial administrative or management activities

This means you can still qualify even if you perform services at other locations (like meeting clients at their offices or working on job sites), as long as you use your home office for administrative tasks like billing, scheduling, bookkeeping, and ordering supplies.

Two Methods for Calculating the Deduction

Simplified Method

The simplified method allows you to deduct $5 per square foot of home office space, up to a maximum of 300 square feet. This means the maximum deduction is $1,500 per year.

Advantages:

• Easy to calculate—just measure your office space
• No need to track actual expenses or maintain detailed records
• No depreciation recapture when you sell your home
• Ideal for small home offices or those with minimal actual expenses

Disadvantages:

• Lower deduction if your actual expenses are high
• $1,500 maximum regardless of actual costs
• Cannot deduct depreciation separately

Regular Method (Actual Expenses)

The regular method involves calculating the actual expenses of maintaining your home office based on the percentage of your home used for business.

Step 1: Calculate Business Percentage

Divide the square footage of your office by the total square footage of your home. For example, if your office is 200 square feet and your home is 2,000 square feet, your business percentage is 10%.

Step 2: Determine Deductible Expenses

Direct Expenses (100% deductible): Expenses that benefit only your home office, such as painting or repairs to the office space.

Indirect Expenses (deductible based on business percentage): Expenses that benefit your entire home, including:

• Mortgage interest or rent
• Property taxes
• Homeowners or renters insurance
• Utilities (electricity, gas, water, trash)
• Home maintenance and repairs
• Depreciation (for homeowners)
• HOA fees
• Security system costs

Non-Deductible Expenses: Lawn care, landscaping, and other expenses that don't relate to the interior of your home are generally not deductible.

Depreciation Considerations

If you own your home and use the regular method, you can depreciate the business portion of your home. This provides additional deductions but comes with an important caveat: depreciation recapture.

When you sell your home, you must recapture (pay tax on) the depreciation you claimed, even if you qualify for the home sale exclusion ($250,000 for single filers, $500,000 for married filing jointly). The recaptured depreciation is taxed at a maximum rate of 25%.

Example: If you claimed $10,000 in depreciation over several years and then sell your home, you'll owe tax on that $10,000 at up to 25%, or $2,500. This doesn't affect your ability to exclude gain on the sale, but it does create a separate tax liability.

Special Rules for Renters

If you rent your home, you can still claim the home office deduction using either the simplified or regular method. With the regular method, you'll deduct your business percentage of rent and renter's insurance, along with utilities and other eligible expenses. Since you don't own the property, there's no depreciation to worry about, and no recapture issues when you move.

Daycare Providers and Special Use Cases

Daycare providers have special rules. You don't need to meet the exclusive use test, but you must use the space regularly for daycare, be licensed or approved by your state (if required), and calculate the deduction based on both the percentage of your home used and the percentage of time it's used for daycare.

Formula: (Square footage of daycare space / Total home square footage) × (Hours used for daycare / Total hours in year) × Total expenses

Record Keeping Requirements

Proper documentation is essential to support your home office deduction. Maintain:

• Photos of your home office showing exclusive business use
• Measurements and floor plans of your home and office space
• Receipts for all deductible expenses
• Utility bills, mortgage statements, and property tax records
• Depreciation schedules (if using the regular method)
• Calendar or log showing business use of the space

Keep these records for at least three years after filing your return (six years if you underreported income by more than 25%).

Common Mistakes to Avoid

• Claiming a space that isn't used exclusively for business: Using your home office for personal activities, even occasionally, disqualifies the entire deduction.
• Overestimating square footage: Be accurate when measuring. The IRS can verify your measurements if audited.
• Forgetting to allocate expenses properly: Only the business percentage of indirect expenses is deductible.
• Not keeping adequate records: Without documentation, you can't substantiate your deduction if questioned.
• Claiming the deduction as a W-2 employee: Employees cannot claim this deduction, regardless of whether they work from home.

Choosing Between the Simplified and Regular Methods

You can choose either method each year, so calculate both and use whichever gives you the larger deduction. Generally:

• Use the simplified method if your office is small (under 300 sq ft), your actual expenses are low, you want to avoid depreciation recapture, or you prefer minimal record-keeping.
• Use the regular method if your office is large, you have high home expenses, you want to maximize your deduction, or you're comfortable with detailed record-keeping.

How to Claim the Deduction

Self-employed individuals claim the home office deduction on Form 8829 (Expenses for Business Use of Your Home) if using the regular method, or directly on Schedule C if using the simplified method. The deduction reduces your net business income, which in turn reduces both your income tax and self-employment tax.

State Tax Considerations

Most states that have income taxes allow the home office deduction following federal rules. However, some states have their own requirements or limitations. Check with your state's department of revenue or consult a tax professional familiar with your state's rules.

Working with a Tax Professional

The home office deduction can be complex, especially when using the regular method or dealing with depreciation. A tax professional can help you determine if you qualify, choose the best calculation method, maximize your deduction while staying compliant, and maintain proper documentation.

At MSN Taxes, we help self-employed individuals and small business owners navigate home office deduction rules. We'll calculate your deduction using both methods, advise on record-keeping best practices, and ensure you're claiming every dollar you're entitled to while avoiding common pitfalls that trigger audits.