The Home Office Deduction: Money You Might Be Leaving on the Table

You’ve converted the spare bedroom into an office. You spend 40+ hours a week there, running your business. Your mortgage payment, utilities, and insurance cover that room just like they cover the rest of your house.

But when tax time comes, most Houston business owners claim nothing for that space.

The home office deduction exists precisely for this situation. And depending on your home’s expenses and office size, it could save you $1,500 to $5,000+ annually.

Who Qualifies

Two requirements. Both must be met.

Requirement 1: Regular and Exclusive Use

The space must be used regularly for business. Not occasionally. Not “when you feel like working from home.” Consistently, as a normal part of your work routine.

The space must be used exclusively for business. Not also as a guest room. Not also where the kids do homework. A dedicated workspace, used only for business.

A desk in your basement that you use every day for client work? Qualifies.

The dining table where you eat meals but also answer emails? Doesn’t qualify.

Exception: If you store inventory or product samples in part of your home, or run a daycare facility, the exclusive use rule relaxes.

Requirement 2: Principal Place of Business

Your home office must be either:

Your principal place of business, OR
A place where you regularly meet clients or customers, OR
A separate structure (detached garage, studio) used for business

Principal place of business means you use it for administrative or management activities AND have no other fixed location for those activities.

A Houston consultant who does all client work at their home office and only occasionally meets clients at coffee shops? Qualifies.

A W-2 employee who sometimes works from home? Doesn’t qualify. (The Tax Cuts and Jobs Act eliminated this deduction for employees from 2018-2025.)

Method 1: The Simple Way

The simplified method is exactly what it sounds like.

How it works:

Deduct $5 per square foot of your home office
Maximum space: 300 square feet
Maximum deduction: $1,500 per year

Example: Your home office is 200 square feet. Deduction: 200 x $5 = $1,000

Why Choose Simplified

No complicated expense tracking required
No depreciation recapture when you sell your home
Less documentation to maintain
Easier to calculate

Why It Might Not Be Enough

$1,500 maximum may undervalue your actual expenses significantly
You can’t carry over unused portions
For larger offices or expensive homes, you’re leaving money behind

Method 2: The Actual Expense Way

The actual expense method deducts a percentage of your real home costs. More work, but potentially much more savings.

Step 1: Calculate Your Business Percentage

Square footage method (most common): Business % = Home office square feet / Total home square feet

A 250 square foot office in a 2,000 square foot home = 12.5%

Step 2: Apply to Eligible Expenses

Direct expenses (100% deductible):

Painting or repairs to the office only
Furniture specifically for the office

Indirect expenses (deductible at your business percentage):

Mortgage interest or rent
Property taxes
Homeowners/renters insurance
Utilities (electric, gas, water)
Home repairs and maintenance
Security system
HOA fees
Depreciation (for owned homes)

Step 3: Calculate Depreciation (Required for Homeowners)

If you own your home, you must depreciate the business portion. This isn’t optional.

Calculation:

Determine your home’s basis (purchase price + improvements - land value)
Multiply by your business percentage
Divide by 39 years

Example:

Home basis: $300,000 (excluding land)
Business percentage: 12.5%
Depreciable basis: $37,500
Annual depreciation: $37,500 / 39 = $962

Putting It Together

Expense	Annual Amount	Business %	Deductible
Mortgage interest	$12,000	12.5%	$1,500
Property taxes	$6,000	12.5%	$750
Insurance	$2,400	12.5%	$300
Utilities	$4,800	12.5%	$600
Repairs/maintenance	$1,200	12.5%	$150
Depreciation	-	-	$962
Total			$4,262

Compare to simplified: 250 sq ft x $5 = $1,250

Actual method saves $3,012 more.

Which Method Should You Choose?

Use Simplified If:

Your home office is small (under 100-150 sq ft)
Your home expenses are low (cheap apartment, paid-off mortgage)
You don’t want to track detailed expenses
You plan to sell your home soon and want to avoid depreciation recapture

Use Actual If:

Your home office is large
Your home expenses are significant
You’re comfortable maintaining records
The calculation shows meaningfully higher savings

You Can Switch

You can choose different methods each tax year. However, once you’ve claimed depreciation using the actual method, switching to simplified doesn’t undo what you’ve already taken.

The Depreciation Recapture Warning

Here’s the catch with the actual expense method: when you sell your home, you’ll face “depreciation recapture.”

How it works: When you sell at a gain, you pay tax (up to 25%) on the depreciation you claimed (or should have claimed).

Example: You claimed $5,000 in depreciation over 5 years. When you sell, you pay up to $1,250 in recapture tax on that $5,000.

This doesn’t make depreciation a bad idea. It’s still a real deduction that saved you money in the years you claimed it. But factor it into your long-term thinking.

Common Mistakes to Avoid

Mistake 1: No Exclusive Use

Working at the kitchen table doesn’t count. Neither does the bedroom where your kids also play. Create a dedicated space, even if it’s a corner of a room separated by a bookshelf.

Mistake 2: Claiming More Than Reality

IRS auditors measure. If you claim 400 square feet but your office is clearly 200, you lose the deduction and face penalties. Measure accurately. Document with photos.

Mistake 3: Forgetting to Claim It

Many self-employed business owners leave this deduction on the table entirely. They assume it’s too complicated or not worth it. At $1,500-4,000+ in potential savings, it’s worth the effort.

Mistake 4: Ignoring the Income Limitation

The home office deduction can’t create a loss from your business. If your business income is $3,000 and home office expenses calculate to $4,000, you deduct only $3,000. The remaining $1,000 carries forward to future years.

Mistake 5: Missing Documentation

Keep records proving:

Square footage of office and total home
Receipts for all expenses claimed
Photos showing exclusive business use
Time logs if the IRS questions “regular” use

Houston Considerations

Texas has no state income tax, so the home office deduction only reduces federal taxes. However, Houston’s housing market affects the calculation:

Property taxes are significant. Harris County property taxes are among the highest in the country. A $400,000 home might have $8,000+ in annual property taxes. At 12.5% business use, that’s $1,000 in deductions just from property taxes.

Larger homes are common. Houston’s suburban sprawl means larger average home sizes, which typically means larger home offices are available.

Cost of living context. While Houston is more affordable than coastal cities, home expenses still add up significantly. Run both methods to see which benefits you more.

Getting the Calculation Right

The home office deduction is valuable but detail-dependent. Many business owners either overclaim (creating audit risk) or underclaim (leaving money behind).

At EZQ Group, we help Houston self-employed individuals and business owners calculate both methods, recommend the better approach, and maintain the documentation needed to defend the deduction.

Want to make sure you’re claiming everything you’re entitled to? Contact us for a tax planning consultation.

This article provides general information and is not tax advice. Tax situations vary, and you should consult with a qualified tax professional about your specific circumstances.