Figuring out whether the simplified home office deduction method or the regular home office deduction method is the right option for4 

When choosing between the regular and simplified methods, the following factors should be considered:

When a home is sold and meets the 2 out of 5-year ownership and use requirements, gain of $250,000 ($500,000 where both spouses on a joint return qualify) can be excluded under Sec 121. However, gain to the extent of depreciation claimed on the home cannot be excluded. When using the simplified method, there is no depreciation claimed and therefore no reduction in basis; thus, the entire home gain, if qualified, is subject to the Sec 121 gain exclusion. This is one reason to utilize the simplified as opposed to the regular method.

The home mortgage interest and taxes are generally deductible on Schedule A (as long as the taxpayer can itemize, and the taxes paid are within the $10,000 SALT limitation) whether or not the regular home office deduction is claimed. So, where the simplified method amount equals or exceeds the depreciation and utility expense portion of the regular method it may be beneficial to utilize the simplified method.

For self-employed individuals the home office deduction generally reduces income for purposes of computing the SE tax except where the individual’s SE income is above the current year maximum amount ($147,000 for 2022). In addition, the 2.9% Medicare element of the SE tax applies to all SE income, with no cap, and the home office deduction will reduce that tax even for higher income taxpayers. This situation generally favors the regular method over the simplified method.