If you began using your home for business before 2003, continue to use the same depreciation method you used in past tax years.
If you began using your home for business in 2003, depreciate the business part as nonresidential real property under the modified accelerated cost recovery system (MACRS). Under MACRS, nonresidential real property is depreciated using the straight line method over 39 years. For more information on MACRS and other methods of depreciation, see Publication 946 (pdf).
To figure the depreciation deduction, you must first figure the part of the cost of your home that can be depreciated (depreciable basis). The depreciable basis is figured by multiplying the percentage of your home used for business by the smaller of the following.
The adjusted basis of your home (excluding land) on the date you began using your home for business.
The fair market value of your home (excluding land) on the date you began using your home for business.
Depreciation table.
If 2003 was the first year you used your home for business, you can figure your 2003
depreciation for the business part of your home by using the appropriate percentage from
the following table.
Table 1. MACRS Percentage Table for 39-Year Nonresidential Real Property
| Month First Used for Business | Percentage To Use |
| 1 | 2.461% |
| 2 | 2.247% |
| 3 | 2.033% |
| 4 | 1.819% |
| 5 | 1.605% |
| 6 | 1.391% |
| 7 | 1.177% |
| 8 | 0.963% |
| 9 | 0.749% |
| 10 | 0.535% |
| 11 | 0.321% |
| 12 | 0.107% |
Multiply the depreciable basis of the business part of your home by the percentage from the table for the first month you use your home for business. See "Table A-7a" in Appendix A of Publication 946 (pdf) for the percentages for the remaining tax years of the recovery period.
Example.
In May, George Miller began to use one room in his home exclusively and regularly to meet
clients. This room is 8% of the square footage of his home. He bought the home in 1993
for $125,000. He determined from his property tax records that his adjusted basis in the
house (exclusive of land) is $115,000. In May, the house had a fair market value of
$165,000. He multiplies his adjusted basis (which is less than the fair market value) by 8%.
The result is $9,200, his depreciable basis for the business part of the house.
George files his return based on the calendar year. May is the 5th month of his tax year. He multiplies his depreciable basis of $9,200 by 1.605% (.01605), the percentage from the table for the 5th month. His depreciation deduction is $147.66.
Depreciating Permanent Improvements
Add the costs of permanent improvements made before you began using your home for business
to the basis of your property. Depreciate these costs as part of the cost of the house
as explained earlier. The costs of improvements made after you begin using your home for business
(that affect the business part of your home, such as a new roof) are depreciated separately.
Multiply the cost of the improvement by the business-use percentage and depreciate the
result over the recovery period that would apply to your home if you began using it for
business at the same time as the improvement. For improvements made this year, the
recovery period is 39 years. For the percentage to use for the first year, see
Table 1, above. For more information on recovery periods, see
"Which Recovery Period Applies" in chapter 4 of Publication 946 (pdf).
Permanent Improvements
Adjusting for Depreciation Deducted in Earlier Years
Figuring the Depreciation Deduction for the Current Year
Information courtesy of the Internal Revenue Service.
