Should You Deduct Your Home Office? The Tax Break That Might Cost You Later

Working from home in North San Diego—whether you’re freelancing, running a consulting gig, or building your own side hustle—comes with perks.

One of the most tempting? The home office deduction.

But here’s the catch: deducting your home office now might increase your

taxes later when you sell your home. Let’s break it all down.

First, What Is the Home Office Deduction?

If you’re self-employed and have a dedicated space used exclusively for business, you can deduct a portion of:

• Your rent or mortgage interest

• Utilities and internet

• Property taxes

• Maintenance and repairs

You can use the simplified method (based on square footage) or the actual expenses method (based on percentage of home used for business).

The Hidden Cost: Capital Gains Tax When You Sell

Here’s what most people don’t realize:

If you claim the home office deduction using the actual expenses method, the IRS considers that portion of your home a business asset. When you sell your home, that small piece is not protected by the primary residence exclusion (the $250K/$500K capital gain tax break).

That means:

• You’ll owe capital gains tax on the business-use portion of your home.

• Plus, you’ll need to recapture depreciation—even if you never saw any cash benefit from it.

Example: You’ve been deducting 10% of your home for business for 5 years in Encinitas. You sell the house with a $300K gain. You may owe tax on 10% of that gain ($30K), even if you lived there full-time.

So, Should You Deduct Your Home Office?

Consider deducting if:

• You plan to rent long-term or never sell

• Your business expenses are high and you need the deduction

• You use the simplified method (less audit risk, no depreciation recapture)

Consider skipping if:

• You expect a big gain when selling your home (very likely in North San Diego!)

• The home office deduction is small and not worth the future tax cost

• You’re not ready to track expenses or face a higher audit risk

Other Deductions for Self-Employed Encinitas Locals

Even if you skip the home office, there are still plenty of legitimate write-offs:

1. Health Insurance Premiums For you and your family (if you’re not covered elsewhere)

2. Business Mileage Keep track when visiting clients, vendors, or networking events.

3. Equipment, Software & Subscriptions Your laptop, Canva Pro, tax software, or Zoom account all count.

4. Marketing & Branding Business cards, social media ads, email tools—yes, even your Squarespace site.

5. Meals (When Business-Related) Coffee meetings, lunch with clients, or meals while traveling—50% deductible.