What this line means
The depreciation deduction for the business portion of your home. Depreciation spreads the cost of your home (excluding land) over 39 years for commercial property, but the IRS treats a home office as residential rental property — so you depreciate it over 27.5 years using the mid-month convention. This line takes the business-use portion of your home’s adjusted basis, applies the depreciation percentage from the IRS table, and gives you the annual deduction. Depreciation is the last expense category applied, meaning it is the first to be limited if your profit is too low.
Does this apply to you?
- You own the home where your business office is located (renters do not depreciate)
- You are using the regular method (Form 8829) for your home office deduction
- You have not fully depreciated the business portion of your home
Easy to overlook
You must claim depreciation even if you do not want to The IRS requires you to reduce your home’s basis by the depreciation you were allowed to take, whether or not you actually claimed it. If you skip depreciation for five years to avoid basis reduction, the IRS treats you as if you took it anyway. Skipping depreciation costs you the deduction now and still reduces your basis when you sell. Always claim it. 1 IRS Form 8829 instructions — Line 41
The lesser of adjusted basis or fair market value applies Line 37 asks for the lesser of your home’s adjusted basis or its fair market value when you first started using it for business. If your home dropped in value after you bought it, you use the lower fair market value — not what you paid. Filers in markets that experienced price declines sometimes use their purchase price and overstate the depreciation basis. 2 IRS Publication 587 — depreciation of your home for business use
Watch out for this
Depreciating land. Land does not wear out and cannot be depreciated. You must subtract the value of the land from your home’s cost or fair market value before calculating depreciation. Property tax assessments often break out land and improvement values separately — use that split. If your assessment does not provide a breakdown, a reasonable allocation (often 20-30% for land in most areas) is required. Depreciating the full purchase price including land overstates your deduction.
Footnotes
-
IRS Form 8829 Instructions, Line 41. https://www.irs.gov/instructions/i8829 ↩
-
IRS Publication 587, Business Use of Your Home, Figuring the Depreciation. https://www.irs.gov/pub/irs-pdf/p587.pdf ↩