The rules for computing the exclusion for business use of your home vary depending on the facts and circumstances involved. See "Business use or rental of home," in Publication 523 (pdf) for details.
Depreciation.
If you were entitled to take depreciation deductions because you used your home for
business, you cannot exclude the part of your gain equal to any depreciation
allowed or allowable as a deduction for periods after May 6, 1997. If you can show
by adequate records or other evidence that the depreciation deduction allowed was
less than the amount allowable, the amount you cannot exclude is the amount allowed.
If you used any part of your home for business, you must adjust the basis of your home for any depreciation that was allowable for its business use, even if you did not claim it. If you took less depreciation than you could have under the method you properly selected, you must decrease the basis by the amount you could have taken under that method. If you took more depreciation than you should have under the method you properly selected, you must decrease the basis by the amount you should have deducted, plus the part of the excess deducted that actually decreased your tax liability for any year. For more information on reducing the basis of your property for depreciation, see Publication 551 (pdf).
This section covers only the basic rules for the sale or exchange of your home. For more information, see Publication 523 (pdf).
Information courtesy of the Internal Revenue Service.
