How to Allocate Indirect Residential Costs to Your Home Office

The most common method used for allocating indirect home expenses is based on square feet. You simply divide the square feet used by your office by the total square feet of your home.

Example:

  • Total square feet of residence: 2,000.
  • Total square fee of your home office: 200
  • Business percentage: 10% (200/2,000).

If total annual indirect expenses are $5,000, you would allocate $500 to your home office (10% x $5,000).

Form 8829, Expenses for Business Use of Your Home

Form 8829, Part II limits the amount of your home office deduction.

Part II of Form 8829 is used to figure the home office deduction. The starting point line 8 where tentative profit is entered. Tentative profit comes from Schedule C, Line 29.

If you sold your home during the year you must add to or subtract from, Tentative profit any net gain or loss reported on Schedule D or Form 4797 related to the business use of your home.

On Form 8829, tentative profit is reduced by certain categories of expenses in a specific order.

  • Subtract the first category of expenses listed on lines 9, 10, and 11 from tentative profit.
  • If any tentative profit remains, subtract the second category of expenses listed on lines 16 through 20.
  • If tentative profit still remains, subtract the final category of expenses, which includes depreciation.
    • This final subtraction may not exceed the remaining amount of tentative profit. In other words, the most you may do is zero out tentative profit.
  • Excess casualty losses or depreciation the exceed tentative profit are carried over to the next tax year. 

Here are the items of expenses and the order for subtracting them from Tentative profit:

  • First, deduct:
    • Casualty losses affecting the home
    • Deductible mortgage interest
    • Real estate taxes
  • Next, if any Tentative profit remains after subtracting the above items, subtract:
    • Excess mortgage interest
    • Home insurance
    • Repairs and maintenance
    • Utilities
    • Other expenses (see list)
  • Finally, if you own your home, the last item to be deducted is depreciation, providing there is still any Tentative profit remaining after subtracting the items in 1 and 2. (Casualty losses are also considered in this calculation.)

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