Is Building a Basement Home Office Tax Deductible?

If you've already got a basement, turning it into a home office is more a matter of remodeling than building. The costs of doing so are 100 percent deductible. You can fully write off every nail, every tile, even the costs of contractors and construction licenses – provided that you're improving the area for business reasons and not for personal use. You can even deduct the costs of a desk, other furniture, office equipment, and installing a separate phone line if you use the phone exclusively for business. It can't be an extension to your existing home line if you're going to fully deduct it.

The issue of business versus personal use is where things might get dicey with the IRS if you claim the cost of remodeling. If your home office is where you pay household bills, keep track of your investments or run your fantasy sports league, the expense of fixing it up is all on you. The newly remodeled work space must be where you work at home for your employer – as long as working from home is for your employer's convenience and not your own. If you're self-employed, it must be your principal place of business. If you have another work location, you must actually run your business from your new setup in the basement or you must deal with clients, customers or patients there. You don't have to use your entire basement for business reasons. You can claim a deduction even if you've only redone and are using one corner of it.

You can claim tax deductions for the ongoing business use of your basement as well, in addition to any construction costs. These expenses are not 100 percent deductible, however. You must calculate what percentage of your home – not just your basement – is dedicated to your work or business. If your new office takes up 10 percent of the total square footage of your home, you can deduct 10 percent of the expenses of maintaining your home. These include the interest portion of your monthly mortgage payment, utilities, insurance, property taxes, even depreciation.

After you've determined that you can claim home office deductions, your next challenge becomes how to do so. If you work for someone else, these are Schedule A deductions. You must give up the standard deduction and itemize if you want to take these expenses off your taxable income. IRS Publication 587 offers a worksheet with instructions and to help you with calculations. If you're self-employed, these deductions are included on Schedule C. Complete Form 8829 first to ascertain the exact amount you can claim. A caveat exists for self-employed taxpayers: the amount of your deduction cannot exceed your business's income. If it does, the IRS uses a three-tier system to determine what you can deduct and what you can't. You'll still get a tax break, but it may not be as much as what you spent on your home office.