Filing rehab expenses for tax returns

[Daniel Rines]

I'm preparing to file my taxes as a land lord for the first time and looking for some help.  I own a duplex and live on the second floor but plan to move out and rent this floor.  Can rehab costs for the second floor be counted as deductible?  I appreciate any insight.

Thanks!

-Dan

[Ashish Acharya]

@Daniel Rines , 

Two things:

Rapairs:

1) Repairs made on the personal side of the duplex cannot be deducted. It is a personal expense, just like your food expense.

2) Repairs made on the duplex are deductible against the rental income.

Improvements:

1) Improvements made on personal side are added to the basis of the property, but you cannot depreciate the personal side of the property. The increase of the basis will help you minimize the taxable gain when you eventually sell the house.

2) Improvements made on the rented side will also be added to the basis, but you can depreciate the improvements on the rental side and deduct depreciation against the rental income. But, you have to recapture the depreciation (pay taxes again on what was deducted ) at the end when you sell the house.

So, a good strategy is:

A) For personal side, do not do repairs because they are treated personal. Always do improvements because they increase your basis thus reduce taxable gain in future. For you, wait until move out to do repairs. 

B) For rental side, do repairs because they are deductible right away and do not have to depreciate over few years as done for improvements. Repairs do not have to recapture when you sell the house too.