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Updated about 8 years ago on .
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House hacking - Sch E
I am currently house hacking and want to know what the best way is to maximize return on Schedule E.
1. Dividing expenses - I see some post saying that I should just divide the unit by half. In my case, my tenants space is much smaller. I currently occupy 59% of house and 41% occupied by tenant (based on living square footage shown on appraisal )
Would you agree that I pro-rate my portion and tenant portion(sch E ) by 59/41? So apply 59% of Mortgage interest/Real estate taxes on Sch A and 41% of other expenses on Schedule E (like utilities, depreciation, repairs?)
2. Depreciation (land vs improvement). I have land value/improvement showing up on both my appraisal and tax bill. appraisal shows more improvement value so I am thinking of going by appraisal number ( obviously ) but wanted to see if this method wont have any negative consequences.
3. Depreciation (Calculation) - Is it as simple as adding purchase price + prepaid closing cost (half of attorney fee and full HOI premium paid with credit prior to closing. No closing cost paid at closing due to sellers concession) - minus total land value on appraisal. Then dividing the result by 27.5? Is this the number that I have to use every year?
4. If anyone knows, how do I prorate above depreciation on turbotax?
5. Future UW income - Will lender typically add back depreciation, interest, hoi,mortgage insurance premium back when they calculate my DTI? I am curious if I can write off less but stay in minus range so that I will have more income (if they add back those above items )to increase income used toward DTI. What do you think?
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Sandra Roddy I can assure you house hacking won't stress out a good CPA :) I see your point though, focus on high value tasks that align with your skill set!
@Account Closed This is exactly the type of return you do not want to be using turbotax for, but I'll try my best to help. House hacking is one of more complicated tax situations involving real estate, especially for things like determining basis and selling the property.
1) This depends. Does the building have multiple units or it is one space? If one space, the percentage of square foot method you describe is fine. If the property is 2 units, you can just divide by two. Common expenses like mortgage int and taxes would be split between your Schedule A and Schedule E, correct. Expenses directly related to the tenant (repair in tenants room, etc.) can be 100% expensed.
2) The appraisal is most likely a better representation of FMV and therefore it is acceptable to use. Don't assign a random percentage-I've seen this before. You need to be able to justify your position.
3) Are you financing this property? There are more options than just adding closing costs to basis. Some costs are required to be amortized over the life of the loan, some might be neither. Ex: Recording fees are added to basis but a credit report fee would be amortized over the life of the loan because it is a fee associated with obtaining the loan.
Hope this helps.
@Account Closed here is a cheat sheet for what's added to basis and what's amortized over the life of the loan:
David S. I would second the thought that you probably shouldn't do this in turbo tax. Get a tax Cpa. It will be worth the cost in the extra savings they will find you and the headache when you realize you did your first few years of returns wrong in turbo tax
@Account Closed
I would not use the appraisal for your land value unless you actually paid the appraisal amount for the property. Instead, use the appraisal to determine the percentage of the total appraised value that was attributed to the land. Then use that percentage multiplied by your actual initial cost basis to determine the amount you paid for the land.
Thanks Taylor.
1. my property is a legal 2 family property with 2 units. I am curious. Would it be illegal to calculate portion by square footage in this case? 2nd floor is only 41% of the house and they are also paying less bills due to their size. if I do 50/50 split, I will be getting less money in return.
2. Sounds great. I will apply your recommendation. What is your thought on depreciation calculation? ((Contract price + closing cost + prepaid closing cost) - calculated land value) / 27.5
3. Yes it is being financed. I have received sellers concession which paid all of those closing cost. Can I still include these items as part of my basis? Only items sellers concession didnt cover was home owners insurance and half of attorney fees.
Great. Thanks Scott I think this is very help. Only thing is that I got a Closing Disclosure instead of HUD-1. I am going to look for similar fields.
Thanks. Its funny because I actually hired a CPA who is also an Enrolled Agent because its the first year I bought this property. But to my shock, I had to 'provide him' all the possible deductions I could think of and itemizing was my idea which boosted refund by 2k. He was like 'oh ok. you do seem to get more' . This is why I decided to do it myself on turbo tax. His number and my number on turbotax matched almost identically.
Thanks very much Dave. This is very helpful
David S. find a CPA that works with lots of people with real estate. I am a CPA and work in accounting but I don't specialize in tax, I pay a knowledgeable CPA to do my house hack taxes to ensure I am getting the latest/all deductions and as another set of eyes for my books once a year. Your depreciation schedule will roll year to year as it is added to, you want it to be correct.
David S. 1) Take consideration one of the biggest tax advantages of real estate- the capital gains exclusion for a primary residence.The owner occupied portion is actually more beneficial from a tax perspective.You don't have to pay capital gains or depreciation recapture on this portion (you're not depreciating this portion), and the interest and taxes on your schedule are not limited like passive losses are with rental properties.
2-3) Regarding the basis, it's really a line by line discussion. Items paid by the seller would not be includable in your basis for the property-you didn't pay them.
Sorry for the typos- typing on my phone!
Trying to claim a tax deduction while house hacking is often too cumbersome. Additionally, you will end up stressing out your tax representative and yourself. Not worth it!
Time is money. Hence, if there are SIGNIFICANT deductions to be made then consider the deduction, otherwise move on and focus your time and energy on alternative options.
Sandra Roddy I can assure you house hacking won't stress out a good CPA :) I see your point though, focus on high value tasks that align with your skill set!