Househacking and Taxes

[Sean Tift]

I just purchased a SFH in Portland, Oregon and Made a decision to Househack to subsidize our mortgage payment. I'd like to know what tax preparations we could begin to consider now in order to ensure we can deduct a portion of improvements made to the shared living areas come tax season 2021.

[Joe Splitrock]

@Sean Tift I would start working with a CPA because determining in service date, cost basis, depreciation, deductions and splitting expenses can get complicated. 

First thing to be aware of it that capital improvements made to the shared living space, likely just increase basis of the property. For common areas or shared expenses like utilities, you prorate the deductible portion based on how much of the property is used as a rental. For example if the property is a 3 bedroom house, you occupy one bedroom, then 2/3 of common space expenses could reasonably be deducted. 

The first step is establishing the in cost basis. This is the value of the property, minus land and adjusted for the portion used for renting. This is the portion that can be depreciated. Depreciation is one of your largest expenses to offset income, but keep in mind deprecation is recaptured when you sell (unless you exchange into another property). 

The next step is establishing in-service date. In service date is the date when the property is available to rent and advertised to rent. This is after rehab and the property is ready for someone to move in. In other words if someone was qualified, they could move in tomorrow. After this point, expenses are no longer part of the initial cost basis and become either deductions or depreciated on shorter terms.

Keep detailed receipts and make sure you have matching transactions (credit card or checks). Again, my advice is talk with a CPA now, so you make the right decisions that will affect you come tax time. I don't think taxes are DIY for a first time landlord. Most anyone I have found doing their own taxes is making major mistakes.