Tax question on duplex house hack!

[Samuel Huntington]

Hello all! 

Currently in the process of renovating our first rental property.  The property is a duplex in MN. We currently have one side rented out and are finishing up renovating the other half.  

We haven't had much experience with the taxes involved with rental properties, but are trying to optimize our potential deductions. Our question is, to be able to deduct our renovation expenses on the one half of the duplex, would we need to have that rented out by the end of the fiscal year? Or would it be possible to move into that unit while we renovate the other half?

Just trying to get our game plan figured out, any advice helps! 

Best, 

Sam 

[Ashish Acharya]

@Samuel Huntington , 

Just to clear things up. let me know If I am understanding this correctly. 

Unit 1) you already have rented one unit now- not renovating right now. - if you ever renovate this unit, the renovation and repair on this unit can be either expensed if repair or capitalized if considered improvements. 

unit 2) you are renovating this unit - you will move into this unit.  - You cannot deduct any repairs done to this unit. The improvements done to this unit can be added to the basis of the property. The increased basis will lower your gain when you sell if you are subject to tax. Normally, you can never deduct repairs on the personal side. if you are doing repairs while doing improvements to the personal side, you can also capitalize (add to the basis) the repair. That is one of the exceptions for repairs. 

Understanding the basic repair vs improvement will be handy. 

Repairs:

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 the 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 the personal side, do not do repairs because they are personal. Always do improvements because they increase your basis thus reduce taxable gain in the future.

B) For the 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