Most business owners who work from home know about the home office deduction. What they don’t know is that years of claiming it can create a surprise tax bill the day they sell their house — even if they think the $250,000 exclusion covers everything.

It doesn’t. Not all of it.

The $250k Exclusion Has a Hole in It

When you sell your primary residence, the first $250,000 of gain is tax-free if you’re single ($500,000 married). Most homeowners know that. What they don’t know is that this exclusion has a carve-out for any depreciation you claimed on a home office using the actual expense method.

That depreciation gets “recaptured” at a flat 25% rate when you sell — and it’s taxable regardless of the exclusion.

Here’s a quick example. You’ve worked from home for 10 years. Your office takes up 12% of your square footage. Your home was worth $400,000 when you started, so your annual depreciation deduction was roughly $1,385 per year (12% × $400,000 ÷ 27.5 years). Over 10 years, you’ve taken $13,850 in depreciation deductions. When you sell, you owe 25% tax on $13,850 — that’s $3,463 in additional tax. Even if the rest of your gain is fully sheltered by the exclusion.

Small number, maybe. But if you’ve worked from home for 20 or 30 years, or if your home is worth $800,000, the math gets real fast.

The “Allowed or Allowable” Trap

Here’s the part that gets people. The IRS recaptures depreciation that was “allowed or allowable” — meaning they can collect it even if you didn’t actually claim the deduction on your return.

Forgot to take the home office deduction some years? The IRS calculates what you could have taken and recaptures it anyway. You got none of the benefit; you still owe the tax.

That’s not a typo. Read it again.

If you've been working from home for years and you're thinking about selling, the time to figure out your depreciation exposure is before you list — not after you've accepted an offer. Let's talk through what you're looking at.

The Detached Office Is Even Worse

If your home office is in a separate structure — a detached garage, a converted barn, a standalone studio — the rules are harder. You don’t just have a recapture problem; you have a full exclusion problem.

The $250k/$500k exclusion only applies to your principal residence. If part of your property is used exclusively for business, you have to allocate the gain. The business portion doesn’t get the exclusion at all. You pay capital gains tax on it as if you sold a business asset.

One client found this out the hard way when he sold a property with a separate office building on the back of the lot. The gain on that structure was fully taxable, and it hadn’t occurred to him — or his previous accountant — to think about it that way.

How the Simplified Method Changes the Math

The IRS offers a simplified method for the home office deduction: $6 per square foot (as of 2026), up to 300 square feet, for a maximum deduction of $1,800 per year. No depreciation. No depreciation recapture.

If you use the simplified method, you skip all of the above. No carve-out. No 25% tax at sale. The full exclusion applies to your entire gain.

The downside is that $1,800 is often less than what you’d get with the actual expense method, especially in a high-value home or a large office. You’re trading a bigger annual deduction now for a cleaner exit later.

What to Do If You’re Already on the Actual Method

If you’ve been using the actual expense method for years and you’re thinking about selling in the next few years, you have options.

First, calculate your depreciation exposure. Add up every year you’ve claimed the home office deduction using the actual method. Multiply by 25%. That’s the recapture tax you’re looking at, ballpark.

Second, consider switching to the simplified method going forward. You won’t recapture what’s already been taken, but you’ll stop adding to the exposure. Future depreciation stops.

Third, if the difference between the simplified deduction and the actual deduction is small — say, $500 or less per year — it may make sense to switch now and simplify your life and your eventual sale.

Fourth, if you’re planning to rent the home before selling, talk to a tax professional. The rules change when the property spends time as a rental.

One More Planning Note for the Future

If you’re buying a new home and plan to set up a home office, think carefully about which method you use from day one. The simplified method at $1,800/year isn’t dramatic, but it’s clean. The actual method may give you a bigger deduction now, but it creates a paper trail of depreciation that follows the house until it sells.

For most people with a standard home office inside the house, the depreciation recapture at sale is manageable — a few thousand dollars. But the more years you work from home, the more it compounds. And in a market like Long Island, where home values have climbed significantly, even small percentages turn into real money.

The home office deduction looks simple on the surface. The exit isn't. If you're a business owner working from home, schedule a call and we'll make sure you're not setting up a tax problem you'll deal with when you sell.

The full rules for claiming the home office deduction are in our guide at /blog/home-office-deduction-sole-proprietor. And if you’ve already been writing off a business vehicle, computer equipment, or other depreciable assets and you’re wondering how recapture works more broadly, see /blog/depreciation-recapture-selling-business-assets.

This post is for general information only and does not constitute tax advice. Rules vary based on your specific situation. Contact a qualified tax professional before making decisions about your home office deduction or the sale of your home. Geiger Tax & Accounting serves clients in Amityville, Long Island, and nationwide. Call (631) 532-5622 or visit geigertax.com/contact to schedule.