Depreciation is an expense allowed by the IRS to recover the cost of your home. You can claim depreciation expenses when you use your home to generate income, either as a rental property or as a space where you regularly work. You don’t have to be self-employed to take a depreciation deduction for the space you work from – you just have to regularly work from home and not have another office space available to perform your regular duties. Calculating depreciation seems a little tricky, but fortunately, the IRS provides depreciation tables to help you quickly determine your expense.
Calculate the business use percentage of your home. If the house is only used as a rental property, the business use percentage is 100 percent. However, if you only use a portion of the home for business use, you’ll have to measure the square footage of the business space and divide the result by the total square footage of your home. Square footage for the business space can be measured by multiplying the length of the room by the width of the room.
Calculate your cost basis in the property. In most cases, your cost basis is the amount you paid for the home, plus legal fees, title insurance, transfer taxes, recording fees or other costs to secure the title to the property. You can also add the cost of any improvements you make to the home. If you just converted the home from personal to rental use, you must use the fair market value on the date of conversion as the cost basis.
Subtract the cost of land. When you purchase a property, the sales price should allocate a portion to your physical home and a portion to land. Land is not depreciable, so you’ll have to subtract the value from your cost basis. If your purchase documents don’t indicate an allocation of property and land values, you can assess 20 percent of your purchase price to land and subtract the result from your total price. This is a standard substitute allocation percentage. The result from this calculation is your adjusted basis.
Multiply your adjusted basis by your business-use percentage. The result is your basis for depreciation.
Download the instructions for Form 4562 on the irs.gov website. You can view depreciation tables in this publication and obtain depreciation percentages quickly. Scroll through the instructions until you find Table C for the General Depreciation System. The IRS depreciates homes over 27.5 years.
Find the year of your property’s business use on the left side of the table and scroll over to the number that represents the month you started using your home for business. The month column will be the same each year you calculate depreciation expenses. For example, if you started using your home for business in February of a given year, you’ll look under the number 2 column each year you depreciate.
- If you don't have a business use for your house and are just curious how much it is depreciating, use the IRS depreciation tables and 100 percent of your cost basis to get an idea. However, market conditions may put a different value on your home. This is a much better way to determine if your home is losing or gaining value when you don't have a business reason to calculate depreciation.
With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.