Home Office Depreciation: How It Works and Recapture
Depreciating the business share of your home under the regular method, and the recapture that follows at sale
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Under the regular method, a home office deduction includes depreciation on the business-use share of the home over 39 years. That depreciation is "allowed or allowable" — it reduces basis whether or not you claim it — and when the home sells, depreciation taken after May 6, 1997 is recaptured at up to 25 percent despite the home-sale exclusion.
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How is home office depreciation computed?
Start with the lower of the home's adjusted basis (cost plus improvements, excluding land) or its fair market value when the office was first used for business. Multiply by the business-use percentage (the office's square footage over the home's total). Depreciate that amount as 39-year nonresidential real property using the mid-month convention — about 2.564 percent a year in full years. A US$400,000 home (US$320,000 building) with a 10 percent office produces US$32,000 of depreciable basis and roughly US$820 a year of depreciation. The figure is computed on Form 8829 and flows to Schedule C.
Two prerequisites sit above the computation: the space must pass the exclusive-use and principal-place-of-business tests (the contractor home office guide), and the total home office deduction — including depreciation — cannot exceed the business's gross income from the home's use, with the excess carried forward.
Do I have to depreciate?
Under the regular method, effectively yes. The tax law's "allowed or allowable" rule means depreciation you were entitled to claim reduces your basis even if you skipped it. A taxpayer who uses the regular method for ten years and never claims depreciation still has US$8,200 of basis reduction and still faces recapture at sale — having received no deduction for it. If you use the regular method, claim the depreciation; if you want to avoid depreciation entirely, use the simplified method.
What does the simplified method change?
| Regular method | Simplified method | |
|---|---|---|
| Deduction | Business percentage of actual home costs plus depreciation | Prescribed rate × square footage (up to 300 square feet); US$5 per square foot, US$1,500 maximum |
| Depreciation | Required (allowed or allowable) | None — deemed zero for the year |
| Recapture at sale | Yes, on depreciation taken (or allowable) since May 1997 | None for simplified-method years |
| Mortgage interest and property taxes | Business share on Form 8829; personal share on Schedule A | Fully on Schedule A |
| Carryover of excess | Yes | No |
| Switching | Year by year; depreciation for regular-method years uses the table for the year switched back | Year by year |
The simplified method trades a smaller deduction for no depreciation and no recapture. It suits small offices, homes likely to sell within a few years, and taxpayers who want no Form 8829. The regular method suits larger offices in higher-cost homes held long-term, where the annual deduction is materially bigger and the recapture is far off.
How does recapture work at sale?
The home-sale exclusion (US$250,000 single, US$500,000 joint) excludes gain on a principal residence — but not the gain attributable to depreciation taken after May 6, 1997 for business use of the home. That portion is unrecaptured section 1250 gain, taxed at up to 25 percent, reported on Form 8949 and Schedule D, with the 25 percent portion figured on the Unrecaptured Section 1250 Gain Worksheet. Because the office is within the dwelling unit (not a separate structure), the sale is one sale of a residence; the allocation of gain to the office is not required as it once was, but the depreciation recapture stands. A separate structure (a detached studio or converted garage used for the business) is different: unless the owner also lived in that part for two of the five years before the sale, its gain is allocated to it, reported on Form 4797, and not covered by the home-sale exclusion.
S corporation owners do not use Form 8829; the corporation reimburses the owner under an accountable plan (the consultant home office guide).
Worked example
A consultant bought a home in 2016 for US$450,000 (US$90,000 land) and has used a 12 percent office under the regular method since 2018. Depreciable basis: US$360,000 × 12% = US$43,200; annual depreciation about US$1,108; total through 2026 about US$9,600. She sells in 2027 for US$720,000. Gain: US$720,000 − (US$450,000 − US$9,600 adjusted basis) = US$279,600. The US$250,000 exclusion (single) shelters the first US$250,000 — but the US$9,600 of depreciation is not eligible for the exclusion and is taxed at up to 25 percent; the remaining US$20,000 above the exclusion is long-term capital gain. Had she used the simplified method for those years, her annual deduction would have been roughly a third of the regular figure, but there would be no US$9,600 taxed at up to 25 percent: the gain would be US$270,000, the exclusion would cover US$250,000 of it, and US$20,000 would remain long-term capital gain.
Frequently asked questions
Do I have to depreciate my home office?
Under the regular method, depreciation is "allowed or allowable" — it reduces your basis whether or not you claim it, so claim it. The simplified method has no depreciation.
What is the recovery period for a home office?
Thirty-nine years, as nonresidential real property, using the mid-month convention — regardless of the home's own character.
Is home office depreciation recaptured when I sell?
Yes. Depreciation allowed or allowable after May 6, 1997 is taxed as unrecaptured section 1250 gain at up to 25 percent and is not covered by the home-sale exclusion.
Does the simplified method avoid recapture?
Yes, for the years it is used — depreciation is deemed zero, so there is nothing to recapture from those years.
Official sources
Publication 587 states: “If you were entitled to deduct depreciation on the part of your home used for business, you cannot exclude the part of the gain equal to any depreciation you deducted (or could have deducted) for periods after May 6, 1997.” — Internal Revenue Service, Publication 587, Business Use of Your Home, https://www.irs.gov/publications/p587
Publication 544 states: “Generally, this is the part of any long-term capital gain on section 1250 property (real property) that is due to depreciation. Unrecaptured section 1250 gain cannot be more than the net section 1231 gain or include any gain otherwise treated as ordinary income.” — Internal Revenue Service, Publication 544, Sales and Other Dispositions of Assets, https://www.irs.gov/publications/p544
Next step
Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk handles home office method selection with sale-horizon modeling, Form 8829 depreciation, accountable-plan reimbursement for S corporation owners, and recapture computation at sale. See pricing or book a call.
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