Tax Question - Put into service as a rental

[John Alosio]

Hello Great people of BP!
I have a question regarding depreciated improvements on a rental property. I do have a CPA. But I just wanted to get a second opinion on my situation.

My first question: This past year I moved out of a duplex house hack and put my unit into service as a rental (2.5 years after purchasing). During the time which I lived there, I made some improvements that I thought would be no problem to begin depreciation after I moved out. However my CPA was concerned about how to treat these items, being that it could raise a red flag for an audit if they were being depreciated over 25 years instead of the typical 27.5. Does this sound right? Has anyone been in a similar situation?

On to my next question:

I Am currently living in my second duplex house hack. I am gearing up to do a similar deal with this house as well. Live here for a few years while I make necessary improvements, then move on to another property and put my unit into service as a rental....

I plan on adding some walls/closets to cure its functional obsolescence.This is not important for me personally since my family is small. The idea is that it would add value/comfort when renting to a larger family.

So... the question is... Should i hold off on making this improvement until after a move out? So that i may Start depreciation at 27.5 years from the day that i put it into service? Or am I over thinking this? Should I just complete the job and writeoff what I can, when the time comes?

I hope this made sense. Thanks for reading!

[Michael Plaks]

@John Alosio

I'm not sure if you're correctly quoting your CPA. If you're, then you need another one.

As far as I understand, you bought a duplex in 2018 and immediately rented Unit B while living in Unit A and working on it. You moved out in 2020 and rented Unit A. Let's say that you bought the duplex for $100k and then put another $10k into fixing Unit A. Under these assumptions:

• Unit B should have been depreciated since 2018, using $50k as its basis for depreciation and 27.5 yrs schedule
• Unit A should be set up for depreciation in 2020, using $50k + $10k = $60k as its basis for depreciation, also on a 27.5 yrs schedule
• Unit B's depreciation is not affected when you start depreciating Unit A; you just add the two depreciation deductions together
• The timing of the $10k improvements does not matter, it is still added to the $50k initial cost
• Part of the $50k / $60k should be allocated to non-depreciable land
• New carpet and water heater are not 27-5 yr improvements, they are 5-yr "personal property" and can be immediately deducted in 2020 - if they were brand new before renting. 
• However, since they are no longer new, you can only deduct their "as is" value as of 2020

There could be quite a few potential complications, so don't use my example for anything but a general concept.