Renters. For those who rent their home, the major advantage of the home office deduction is that a portion of your rental payments will be deductible. Renters who don't qualify for the home office deduction ordinarily can't deduct any of their rental payments, so working out of your home can result in significant tax savings.

Homeowners. For homeowners, your deduction is not based on the fair rental value of the home. Instead, you may deduct a portion of your real estate taxes and your qualified mortgage interest (but not principal) payments on the home. You can also claim a depreciation deduction to recover some of the home's purchase price.

"Real estate taxes" include the amount of taxes actually paid to the taxing authority on your behalf during the year, which may be different from the amount that your mortgage holder requires you to pay into an escrow account. Real estate taxes do not include amounts paid to any homeowner's association or condominium association. They also don't include assessments for local benefits like streets, sidewalks, or water and sewer systems -- instead, these amounts may be depreciated.

"Qualified mortgage interest" may include interest on a second mortgage, or a home equity loan. However, there are dollar limits that apply. Only interest on mortgages up to $1,000,000 used to buy, build, or improve your property, and interest on home equity loans up to $100,000, is considered "qualified." If you think either of these limits might apply to you, consult your tax advisor or get IRS Publication 936, Home Mortgage Interest Deduction, for more detailed information on computing your deduction.

For both renters and homeowners, the deductible portion of the rental, tax, or interest payments depends on the percentage of the home's space that is used for business. If you start or stop using the office during the year, the percentage of time that the office is used will also be a factor.