Need tax help with duplex, Schedule E and 4562.

[Justin H.]

Hey Guys,

I'm pretty well versed with doing my own taxes, using turbotax or whatever.. I have the 2008 home and business edition here.

This year I bought my first house, a duplex. I live in the lower, and the upper is rented.

Can someone walk me though what to do with the taxes?

I'm claiming half of the mortgage interest on the schedule A, half on the schedule E. Same with the taxes, and PMI.

I write off half of the water bill.

I put about 5 grand into the house. I have every single receipt for that 5 grand.

Most items were buying supplies to repair the house myself. Paint, little tools, gutters..
Do I claim these items under "supplies" or "repair"..

I bought about 1900 dollars in new appliances for the rental unit. I am on the page where I depreciate the items. Can I just lump the 5 appliances together, and call them "appliances" for 1900 dollars, or do I need to do them one piece at a time...

Example Stove for 350 dollars or whatever, then depreciate that over 5 years..

My final and most important question...

I understand that I can depreciate the rental unit. Would I put the purchase price for the rental unit to be exactly half of what I paid for the house?

I'm pretty confident I can get the taxes done myself, its just the depreciation that is stumping me for right now...

As it turns out, I'm going to be claiming a loss of about 1200 dollars for this year on the unit. This was because I only got 5 months of rent out of it, and we totally refurbished the entire place.

THANKS.
Justin

[Dave Toelkes]

Justin,

You have the right idea, but your execution needs a little fine tuning.

First, an aside. PMI became a Schedule A deduction for owner occupied properties in 2007. At the time the legislation was enacted, only homeowners with adjusted gross income less than $110,000 and who itemize their deductions are eligible to benefit. I have not kept up with recent changes, so I don't know if these limitations are still in place.

Now, for your question. If the square footage of the lower and upper units is approximately equal, then just split the mortgage interest, property taxes, and PMI in half. For the first half, take a Schedule A deduction for your residence unit, and take a Schedule E deduction for the rental unit for the second half.

The water bill gets a little tricky. The assumption here is that the units are not separately metered and that water is included in the rent. If the rental unit is occupied, then it would be reasonable to divide the bill in half. You can take a Schedule E expense for the the half attributed to the rental unit. However, when the unit is vacant, and there is no water usage attributed to the rental unit, then you can only take half of the "base" charge as a rental expense. The base charge is the amount you pay anyway even if your consumption is 0.

Same with the electric bill, if the units are not separately metered.

You say you put $5K into the house making cosmetic repairs. Things that you bought specifically for the rental unit are fully deductible as a repair expense. The cost to repair common elements such as roof, gutters, landscaping, driveway, etc, can be split in half. Half of that cost is a Schedule E repair, while the other half is a personal, non-deductible expense. If you bought enough paint to completely repaint the interior the same color, then it would be reasonable to take a Schedule E repair deduction for half the cost of paint and brushes.

Supplies are usually consumable items. Light bulbs you purchased for the rental unit and any cleaning supplies you purchased specifically to clean the rental unit are examples of a Schedule E "Suppllies" expense. In practice, the IRS does not really care whether you claim these things as supplies on your Schedule E or just lump them into your maintenance/cleaning expense on Schedule E.

When you depreciate the rental unit, you need to determine its depreciation basis. Land can not be depreciated. So the first thing you need to do is figure out how much you paid for the dwelling structure, and how much you paid for the land it sits on.

Start with your appraisal. See if the appraisal allocates the value of the property between the land and the improvements. If not, go to your county tax assessor and look up your property card. Maybe you can do that online. The property card will allocate the "assessed" value of the property between land and improvements.

You want to calculate the ratio of the value of the improvements to the value of the property. For example, if the appraisal or tax assessor shows the property is valued at $200K with $50K allocated to the land and $150K to the improvements, then your cost basis for the dwelling structure will be 75% of whatever you paid for the property. If you paid $300K for the property, then the dwelling structure will have an initial cost basis of $225K in this example.

Now, take your cost basis for the dwelling structure and divide that in half. The result is your depreciation basis for the rental unit. Residential rental property is depreciated on a straight line basis over 27.5 years. The first year you depreciate the property, you prorate the annual depreciation expense for the portion of the year that the rental is in service. Since you only got five months of rent for the unit, I am guessing that the property was placed in service somewhere around the middle of the year. The property is placed in service whenever the property is available and advertised for occupancy. Even if the property is not tenant occupied, it is still in service if it is ready and available for rental use. The IRS has a publication on Depreciation with a table that will tell you how to compute your first year depreciation based on the month you place the rental into service. If you use TurboTax, the software will do that calculation for you.

I suggest that appliances you installed in the rental unit be depreciated individually and not lumped into a group. It is OK to lump them all together if you wish, but if you bought several appliances it will be easier for you in the long run to depreciate each appliance separately. The reason I suggest this is because each appliance will wear out or break down at different times. If you have to replace one of the appliances, you don't have go go through the tedious computations to "back out" the unused depreciation for that one appliance from your lump sum group.

For future reference, TurboTax Premier (home edition) will handle all the Schedule E stuff for your personal tax return. You only need the Home and Business version if you are operating a sole proprietorship which you will report on Schedule C and you want the expanded help and interview that Home and Business provides for Schedule C.