Tax Questions for House Hack

[Alex Lebhar]

Hi everyone,

I am new to the real estate investment game and recently bought my first home. I am renting out one of the rooms as a house hack and had a few tax questions as I work to keep records:

1. How does depreciation factor into a house hack? Since I am essentially renting half of my home, I am assuming I would have to divide depreciation in half? How would I calculate this?

2. My understanding is that repairs needed to make the home rentable are tax deductible. With a house hack, would I only be able to deduct 50% of repairs from my income (for example: I may need to replace my HVAC in the next year, which will cost around $5,000-$6,000, so would I be able to deduct half of that amount)?

3. What happens if the business expenses (i.e. maintenance/repairs, etc) end up being more than the rental income I make in a tax year? Does this lead to a tax credit, or would I just pay 0 in taxes on my rental income (lease starts in September so there are not many months to accrue rent in the first year).

4. What other deductions should I be keeping track of? I know that PMI interest is one.

5. In a house hack, what services are considered tax deductible? For example: would landscaping be tax deductible to a certain percentage?

6. Do any of you do your own taxes on your rentals, or is it really worth it to leave to a CPA? I would like to try to learn it myself, but obviously don't want to get audited for making a rookie mistake. I would love to know good resources to learn more.

Hopefully these questions can also help someone in a similar spot. Thank you all for your help!

[Nicholas Aiola]

@Alex Lebhar

1) You would split the basis between rental (depreciable) and personal (not depreciable). Remember that land is not depreciable in either scenario.

2) You must distinguish between repairs and improvements. Repairs are deductible as operating expenses and improvements are capitalized and depreciated. Expenses before the rental is placed in service are generally added to basis (capitalized). Replacing HVAC is an improvement. Either way, expenses that relate 100% to the rental unit can be deducted/capitalized in full. Expenses that relate to common areas (landscaping, common utilities, etc.) must be split.

3) Depends on your other income. If you make less than $100k, you can write off up to $25k of net rental real estate losses against your other income each year. If you make over $150k, you can't deduct any net rental real estate losses - they are suspended and carried forward. If your income is between $100k and $150k, you will be able to deduct some (possibly all, depending on the amount) of your net rental real estate losses.

4) Check out Schedule E for a starting point.

5) Anything that's ordinary and necessary in the course of operating your rental business. The rental portion of landscaping is deductible.

6) I do my own taxes for my rentals...but I'm a CPA ;) If you're uncomfortable or unsure, hire it out. Especially in the first year you place a rental in service - the most common mistake we see from DIY-ers is incorrectly calculating basis, which means an incorrect depreciation deduction. This affects every year's tax return that you hold the rental.