Home Office
The IRS allows you to deduct the costs related to the business use of your home. These includes things such as rent, mortgage, property tax, condo fees, telephone, and utilities. Use form 8829 to report these expenses. The numbers here get carried over to form 2106 or Schedule C, and deductions on Schedule A will be reduced by the corresponding amount. But read the recapture section below for the potential dangers of depreciating your home.
Exclusive use: Please be aware that your home office must be used exclusively for the business on your Schedule C or form 2106. If the home office is used for a second business or for personal reasons, it does not qualify. The home office may be part of a room, but it would be good idea if it is clearly marked as such, such as with a divider.
For schedule C taxpayers: Part of the costs, such as mortgage interest and property taxes on the business square footage of your home, just move from Schedule A to C. Note that only the business portion of these expenses appear on Schedule C. This makes them free of the itemized deduction phase out and alternative minimum tax. It also lowers the net business income, and thereby the self-employment income tax and AGI.
Recapture: If you are filing form 8829, you have to take depreciation on the business portion of your home. Of course, this is only the case if you own your house. When you sell your house, you have to pay 15% tax on the depreciation you took over the years. You may also have to pay taxes on the capital gain of the business portion of your home, without any exclusion, if your home office is not part of your main home.
Official documentation:
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IRS Publication 587 (business use of your home)
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IRS Publication 535 (business expenses)
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IRS Publication 523 (selling your home)