If you have a side hustle, you ought to think about creating dedicated space in your home for a home office.

Not only does a home office give you space to manage your business and maintain records in a professional manner, home offices can create valuable tax write-offs for expenses that would otherwise not be deductible. A home office can even help you recover some of deductions lost in last year’s tax law, making this break even more worthwhile.

“There’s some basic criteria that you have to meet to claim a home office,” says Jennifer Lowe, senior director at the tax publishing and information firm of Wolters Kluwer. “But if you have a side hustle, you ought to at least see if you qualify.”

What makes a home office deductible?

Most businesses get to deduct the cost of their office space as a legitimate business expense. That holds true regardless of whether the office is a rented storefront or is located somewhere in your home. However, because personal expenses are not tax-deductible, you can only deduct the portion of your home that’s used regularly and exclusively as an office. Exclusively is the operative term and the toughest test when it comes to claiming home office deductions, says Dave Du Val, chief customer advocacy officer at TaxAudit.

If you have a dedicated office, but use it as a guest room even 1% of the time, it could fail the exclusive use test, causing the Internal Revenue Service to trash your deduction, Du Val says. You do not, however, need to dedicate an entire room to being your office. You just need space – a desk; a corner; or section of your house — that’s used for nothing else.

How much is the tax break worth?

The value of this break depends on a lot of factors, including the size of your office and the cost to maintain it.  It also depends on whether you rent or own your home and what method you use to claim the deduction. A few illustrations may help explain why.


Consider a hypothetical consumer, John, who rents an 800-square-foot apartment for $1,000 per month. The apartment has two bedrooms that are each 200 square feet. One of those rooms is used exclusively as a home office.

John has two choices – use the “simplified” home office deduction, which allows him to write off $5 per square foot; or claim “actual expenses.” With the simplified method, he would multiply $5 by the 200-square-foot office space and claim a $1,000 deduction.

However, in this case, he’d be far better off using the actual expense method. This method lets you write off the appropriate portion of your rent, utilities and maintenance expenses. To claim the deduction this way, he determines what percentage of his space is dedicated to the office – 25%. He then multiples that percentage against all his relevant expenses.

For instance, he’d claim $250 per month of his rent (25 percent multiplied by the $1,000 monthly cost); plus 25% of his water, gas, trash and electric costs. Assuming that these utilities cost him $150 per month, his year-end write-off will amount to $3,450 – the $37.50 in monthly utility costs, plus the rent, multiplied by 12 months).

Naturally, his other business expenses — the cost of necessary equipment, software, business meals and entertainment, advertising, etc. — is also deductible. However, these expenses are deductible regarless of whether the taxpayer has a home office. 


The actual-expense method is a little more complicated for a homeowner.  That’s because you won’t have rental costs. But you will have mortgage interest, property tax, insurance, maintenance, utility and other costs.

Let’s say John lives and works in Malibu, California. His 800-square-foot “cottage” on the beach, is valued at a whopping $1.5 million. He pays $1,000 per month in property tax; $5,000 per month in mortgage interest; $100 per month on homeowner’s insurance; and spends the same $150 per month on other utilities. He uses the same 200 square feet for his office.

His deductions for insurance and utilities amount to $62.50 per month — $750 per year. However, he can also deduct a pro-rata share of his property taxes, mortgage interest expense and he gets an additional deduction for the “depreciation” – an imputed decline in value – of his business structure. This is where the home office deduction gets really lucrative, but also really complicated.


Why? First of all, to claim depreciation deductions, you have to determine what portion of your property’s value is structure and what portion is land. Why? The IRS gives you the ability to write off the imputed decline in value of the structure, but the rules say that land doesn’t depreciate. So the value of the land has to be subtracted before determining the deduction. For example’s sake, we’ll assume that John’s structure is worth $1 million; the land is worth $500,000. (If you’re claiming a big deduction, we’d suggest you have an appraiser come up with the land and structure values.)

Business assets are depreciated over a 39-year period. So, John would divide $1 million by 39 to determine that his depreciation write-off is $25,641.

He can also claim a share of the property tax and mortgage interest expenses. But these are at least partially deductible on his personal return too. He can’t double-deduct an expense. He can only claim the business portion of what’s left.

Because the new tax law limited state tax deductions to $10,000 annually, we can assume that John is losing at least $2,000 annually in these write-offs.

Since his home mortgage is also likely to be over the deductible limit, he may be losing mortgage interst deductions, too. If you assumed that he lost the ability to deduct $1,000 per month of his $5,000 per month in mortgage interest costs, his home office may allow him to recover that $12,000 deduction too.

The bottom line: John’s home office could generate about $50,000 in annual tax write-offs. Naturally, if his home was worth less; his expenses were lower; or he used less of the home as an office, his write-offs would be consideraly less lucrative. 

The catch

What’s the catch? There are several. First, when you sell your home, you’ll have to “recapture” any depreciation that was previously claimed and pay tax on it then. Paying tax in the distant future is arguably better than paying it now, but if you’re planning to sell your home in the next few years, it would be smart to consult a tax accountant about the method you use to claim the home office. The simplified method, though less lucrative, does not require depreciation recapture.

Secondly, you can generally only use home office deductions to reduce your business income. So if you have less business income than you have home office deductions, you may not get as much value from them. And, because of the complexity of the calculations when you’re using real numbers, rather than making assumptions for illustrations sake, it’s best to hire a professional preparer when claiming this break, so this might add to your tax preparation costs.

Finally, home offices are widely considered to be an audit trigger, boosting the chance that the IRS will give your tax return additional scrutiny. That shouldn’t dissuade you from taking a valid deduction — particularly one as lucrative as this — but it also demands that you keep meticulous records. Those records should show how you valued the structure; the square footage of your home office; the expenses you’re writing off; and establish that the home office is not used for any personal/non-business purpose.

“Records might not seem that important right now, but if you’re ever audited, they are the key to everything,” says Du Val.