House Hack Improvements on Personal Side - Tax Implications

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House Hack Improvements on Personal Side - Tax Implications

Caleb Gray
Sycamore, IL · Member since 2017 · 26 posts · 9 votes

Hello BP,

I recently did a small amount of improvement (<$1000) on one side of a duplex that I am now living in. Projects included installing vinyl plank flooring in two rooms, refinishing kitchen cabinets, and installing a new range hood as well as some basic painting. Now, I jumped into all of this without doing my research on how this will be reported on my taxes (doh!). I see now that all of that work should be considered personal for the time being and can't be reported on my taxes while I'm living there. However, I've already paid for all of these with my separate 'business' funds (where I keep my rental income/expenses). I'm also treating myself like a tenant by paying the normal rental rate into this account every month.

My questions are:

  1. Should I reimburse my 'business' account from personal funds because those expenses won't show on my tax return for 2017 or 2018?
  2. When I move out, what will I be able to deduct from the improvements I just finished and how will I do that?
  3. Is the 'paying myself rent' strategy sound or are there better ways to handle it for house hacking a duplex?

Thanks!

Caleb 

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  • Ryan Detig
    Nederland, TX · Member since 2016 · 109 posts · 92 votes
    8y

    @Caleb Gray Just to clarify I am not a CPA. Couple of questions I have regarding this post. Do you own the property personally or is it in an LLC? Is there an actual separate business account with its own tax ID or is it just a separate account you have in your name? I am pretty sure the government does not allow you to pay your own LLC rent. You might want to look into that.

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  • Caleb Gray
    OP
    Sycamore, IL · Member since 2017 · 26 posts · 9 votes
    8y

    Hey Ryan,

    Thanks for the reply! I personally own the property (just getting started!) and the account is just a separate one in my name.

    Further thoughts?

    Thanks!

    Caleb

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    8y

    @Caleb Gray , 

    1. Should I reimburse my 'business' account from personal funds because those expenses won't show on my tax return for 2017 or 2018?

    I am guessing you dont have LLC or other entity, so you technically do not have to reimburse anything since the money that you are setting aside is also your money, not your's entities money.

    But, to make the bookkeeping easy, yes pay back that money you used to from your business fund so that you cash matches and your financials ties. 

    2. When I move out, what will I be able to deduct from the improvements I just finished and how will I do that?

    You will not deduct those. that improvement is added to the basis of your property. When you sell the house, your gain will be lower by 10k. So, you get the benefit when you sell the house.

    3. Is the 'paying myself rent' strategy sound or are there better ways to handle it for house hacking a duplex?

    Paying rent to yourself is accomplishing nothing.  Just keep track of the cash and expenses of the rented unit. If you put your "rent" that is actually not an rental income in your business fund, that is complicating your bookkeeping. 

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  • Caleb Gray
    OP
    Sycamore, IL · Member since 2017 · 26 posts · 9 votes
    8y

    @Ashish Acharya

    I was informed by another investor in my area to treat it like I was a tenant paying rent to that separate account, and then handle all expenses and the mortgage payment out of that account, just like if I wasn't living there. It was my understanding this was to show what the income would be to a bank in a couple of years if I come back wanting another loan and want to have the rental income considered in that new loan. Is there any credibility to that at all?

    If the answer is "no" then I have some follow-up questions:

    1. In addition to reimbursing my 'business' account for the expenses incurred while improving my side of the duplex, should I reimburse my 'personal' account for the rent that I paid myself?
    2. Should I be paying the mortgage payment (PITI) from the separate 'business' account or from my 'personal' account?

    Thanks!

    Caleb

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    8y
    Originally posted by @Caleb Gray:

    @Ashish Acharya

    I was informed by another investor in my area to treat it like I was a tenant paying rent to that separate account, and then handle all expenses and the mortgage payment out of that account, just like if I wasn't living there. It was my understanding this was to show what the income would be to a bank in a couple of years if I come back wanting another loan and want to have the rental income considered in that new loan. Is there any credibility to that at all?

    If the answer is "no" then I have some follow-up questions:

    1. In addition to reimbursing my 'business' account for the expenses incurred while improving my side of the duplex, should I reimburse my 'personal' account for the rent that I paid myself?
    2. Should I be paying the mortgage payment (PITI) from the separate 'business' account or from my 'personal' account?

    Thanks!

    Caleb

    I have heard people do that. 

    From bookkeeping and tax perspective, it is just messier.  

    [email protected]941-914-7779
    INVESTOR FRIENDLY CPA®5241 Reviews
    WebsiteView Page
    TaxMD™ | AI-Powered Tax Planning
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