Tax Strategies for House Hack + Rent by Room

[Sarah Davis]

Howdy all, 

I just acquired a duplex here in Austin, Texas and I'm trying to set up my books where I'm keeping track of things appropriately. I will be renting out the other side plus one room on my side. 

I'll be addressing overall large maintenance issues for the whole structure (electrical, siding, HVAC) plus cosmetic updates on my side while I'm in it (eventually switching sides to do the same for the other). 

I understand updates/maintenance for my personal residence wouldn't be considered a part of the rental business, but it's really the renting a room on my side that has stumped. 

Any broad tips or tricks? 

Taking recommendations for a CPA here in ATX who would be familiar with my situation. 

[Ashish Acharya]

Originally posted by @Sarah Davis:

Howdy all, 

I just acquired a duplex here in Austin, Texas and I'm trying to set up my books where I'm keeping track of things appropriately. I will be renting out the other side plus one room on my side. 

I'll be addressing overall large maintenance issues for the whole structure (electrical, siding, HVAC) plus cosmetic updates on my side while I'm in it (eventually switching sides to do the same for the other). 

I understand updates/maintenance for my personal residence wouldn't be considered a part of the rental business, but it's really the renting a room on my side that has stumped. 

Any broad tips or tricks? 

Taking recommendations for a CPA here in ATX who would be familiar with my situation. 

Two things:

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 in 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 a few years as done for improvements. Repairs do not have to recapture when you sell the house too.