The fire was reported at an unoccupied single-story home located in the 2500 block of Sleepy Hollow Lane shortly before 1 p.m., fire Capt. Rob Brown said.
The home's residents were doing work on the house before moving in and had stained the floor and put the used oily rags in a bucket, Brown said.
It appears the oily rags spontaneously combusted, he said.
Fire officials are urging residents to use caution when disposing of oily rags.
"The best thing to do...is either put them in an approved metal bucket designed for oily rags or just lay them out flat in an open area where they can dry," Brown said.
The fire caused an estimated $40,000 in damage, with most of the fire damage occurring in the kitchen and general smoke damage affecting the rest of the house, he said.
The fire was under control by around 1:30 p.m. and caused an estimated $40,000 in damage, Brown said.