Depreciation value for rental in owner occupied 2 family
Member since 2023 · 3 posts · 1 vote
Depreciation value for rental in owner occupied 2 family
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Linda WeygantPro Member
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votesQuote from @Stacey Schwartz:
I'm new to this. Bought 1st home as a 2 family fixer upper last year. Taxes are in progress but I am stumped on factoring depreciation value on the rental property. How is the depreciated value calculated for an owner occupied 2 family home? Is the depreciation value claimed on the rental property calculated against half of the total cost basis? The rental property is roughly 50% of the living area in the 2 family home.
At this point, I would advise putting yourself on extension and engaging with a CPA after April 18. You can depreciate the building, but there are a LOT of rules associated with this and you want to make sure your calculations are correct.
- Request an extension for yourself at https://www.irs.gov/forms-pubs/extension-of-time-to-file-your-tax-return
- Remember, an extension of time to file is not an extension of time to pay. If you think you will owe either federal or state taxes, you should make a payment with your extension request.
5 Replies
- Lender · CA · Member since 2018 · 638 posts · 393 votes3y
I am not a CPA, but I do not believe that you can depreciate any home that you occupy. Even multi unit. Definitely consult a CPA.
- Member since 2023 · 3 posts · 1 vote3y
I found some good information from another post response on this- but it is from 5 years ago. Are these guidelines still current?
Quote from @Dave Toelkes:
When you have a multiunit rental property, the IRS requires you to treat each unit as a separate property. Your option #1, with some refinement, is the only available option to you. If both sides of your duplex are rentals, then you have two properties, each with a separate address, a separate schedule E, and a separate depreciation schedule.
Repairs that are directly allocated to a specific unit are expensed on the Schedule E for that unit. Improvements allocated to a specific unit are added to the schedule of depreciable assets for that unit and depreciated as a separate asset from the rest of the dwelling structure.
Repairs and improvements to the entire building are divided between the two units and treated as separate expense items or separate depreciable assets for each unit. If the two units have the same or nearly the same square footage, then allocate the costs on a 50/50 ratio.
In your case, you are occupying one unit as your primary residence and the other is a rental unit. Determine the cost basis for the dwelling structure as the purchase price of the property minus the value of the land. Your depreciation basis for the rental unit is one half of the cost basis for the dwelling structure. Your initial tax basis for your residence unit is the other half of the basis for the dwelling structure plus one half of the land value.
You still allocate one-half of global property costs (such as property taxes, yard maintenance, exterior painting) to each unit, but you can only expense the rental unit share on your Schedule E. The portion attributed to your residence unit is a non-deductible personal expense. Capital improvements that benefit the entire building (e.g., a new roof) are also equally allocated between the rental unit and your residence unit. The improvement cost for the rental unit is depreciated as a separate asset on a new 27.5 year schedule, while the cost allocated to your residence unit is added to your basis.
When you decide to convert your residence unit to a rental, you need to determine the fair market value of your residence unit. If the fair market value is less than your adjusted cost basis, then the lower FMV becomes the tax basis for your residence unit and that tax basis minus the land value becomes your depreciation basis for your new rental unit. The tax basis and depreciation basis for the original rental unit is unchanged. You will have two separate depreciation schedules, each on a different timeline.
The key point here is that even though you have two units under the same roof, the IRS says you have two separate properties and each has its own tax treatment. I
- 3yLinda WeygantPro MemberInvestor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
Quote from @Stacey Schwartz:
I'm new to this. Bought 1st home as a 2 family fixer upper last year. Taxes are in progress but I am stumped on factoring depreciation value on the rental property. How is the depreciated value calculated for an owner occupied 2 family home? Is the depreciation value claimed on the rental property calculated against half of the total cost basis? The rental property is roughly 50% of the living area in the 2 family home.
At this point, I would advise putting yourself on extension and engaging with a CPA after April 18. You can depreciate the building, but there are a LOT of rules associated with this and you want to make sure your calculations are correct.
- Request an extension for yourself at https://www.irs.gov/forms-pubs/extension-of-time-to-file-your-tax-return
- Remember, an extension of time to file is not an extension of time to pay. If you think you will owe either federal or state taxes, you should make a payment with your extension request.
- Request an extension for yourself at https://www.irs.gov/forms-pubs/extension-of-time-to-file-your-tax-return
- Investor · Fort Lauderdale, FL · Member since 2020 · 1k+ posts · 755 votes3y
@Linda Weygant absolutely agree with you on this.
@Stacey Schwartz As Linda said, you don't want to do this incorrectly and end up paying a penalty or go through an audit done later. Consult a CPA who is familiar with RE income. Pay a little more than your estimated income taxes now and get the refund back later.
- 3yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
It appears that you have a house-hack.
As a result, you have a property that is both a personal residence and an investment property.
You can depreciate a portion of the house that is treated as an investment / rental property.
Basit Siddiqi CPA4.979 Reviews
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