All Forum Posts by: Account Closed

Hi, looking for some insight and suggestions on next steps with my ADU and rental situation.

At the end of summer 2022 I completed and received a CofO for an attached ADU in Los Angeles. I moved into the ADU and began renting out my main home to my former roommates on the books so to speak, (ie paying taxes, official lease etc.)

When I reviewed the topic a year ago I was told to go on Zimas and see the designation under housing. It showed as non-RSO and non-AB 1482. Therefore I included no RSO wording with their lease. Only a note that any increases would be governed by CA law.

Fast forward to last week, I received an LAHD mailer with my parcel number on it, congratulating me on my ADU, but then laying the groundwork for RSO fees and SCEP inspections, for BOTH my ADU and main home.

The letter goes on to say that an attached ADU isn't RSO concerning rent increases, but the main home is RSO (pre 1978) and both have to abide by rent registry rules, eviction protection and SCEP.

So far I have received no bill nor notice of inspection, and have not registered either unit with LAHD. The letter pushes the pro-active approach saying just b/c you didn’t receive it, doesn’t mean it’s not due, so you need to register and pay fees. It also mentions penalties for delinquent fees.

However when I log into Zimas, it’s still showing as a non-RSO, non-AB 1482 single family residence property.

My questions:

1) Should I wait for a bill or notice to claim exemption on one of the properties and/or register?

2) Once registered, what is the timing for the first inspection? And if I don’t register and instead pay penalties, will there be an inspection at all until I’m forced to register?

3) What does LAHD use to determine who lives in what unit? Do they look at Utility bills? Taxes?

4) Can I legally refuse an inspection on either unit in an attached ADU scenario?

Overall my concern here is timing and an overzealous inspector. I'm reading lots of nightmare stories online and these inspections sound like big business $$. My funds (and mental capacity) are absolutely tapped after building the ADU during the pandemic.

In 12 years I’ve also updated various things throughout the home unpermitted (bathroom tile, shower valves, vanity, kitchen cabinets) etc..

Additionally the floor always had a slope to it, about 3/4” in a 10-15’ span. There was a fire and a bunch of permitted repairs were done to rebuild 60% of the home a few years before I bought it. I was assured by my home inspectors this was normal, but now I’m worried for LAHD’s take.

Ideally if I can either push off an inspection, or not have it at all, I can at least get some more time to recover my finances.

And advice or insight on timing or exemption in my situation is much appreciated!

@Bryan Zuetel thanks this is exactly what i was looking for, for my assessment. It’s looking like 45% of the home is technically “investment property” (if common areas are allowed to be split 50/50).  45% of 45k is $20,250. After all is said and done, revising returns, paying professionals and going back to claim, i’m probably losing about $3000-5000 per year I revise. Even if I only go back one year to revise, I’m not sure $15-17k additional gain is worth the risk, fees and gymnastics.

Thank you everyone for helping me evaluate.

@Dave Foster Thanks for your reply.

In this situation, how many months would I need to claim a renter to get the 1031? I understand the risk of audit which is a good reason to “come clean” so to speak, but going back the full 5 years to amend tax returns not only seems daunting, but will also yield a higher or equal tax then the benefit from the 1031. I also feel like that move in itself would trigger an audit. 

First post. I am a lurker for sure,  so thank you guys for all your great information so far.

I am single, and currently have a home in Los Angeles valued at approximately $700k. I purchased this home 7 years ago for $241k. I did a refi 5 years ago to start a business, pay down debt and redo the kitchen, so my current mortgage is $334k.

My question:  

I’ve see on these forums that it is indeed possible to combine 1031 exchange and 121 exclusion so long as you’ve lived in the home 2 out of the past 5 years and also can prove you’ve used the home as an “investment property”. 

For the investment property portion... I’ve been renting a room in the house to a roommate/tenant for the past 5 out of 7 years... however I haven’t claimed a renter on my taxes. 

If my end goal is to sell my property in 2019, would my move be to show the rental on my 2018 taxes and possibly even revise my taxes from a previous year to help prove the “investment” stipulation of the 1031? And does a roommate/renter even count as making my home an “investment property”? or do I need to be completely moved out for it to count? 

I realize i’d pay tax on the rental income, but that would still be less than the tax i’d owe on the money above the $250k exclusion without the 1031 exchange. Way less if I can get away with showing only 12 months vs 24.

Alternately, i’ve claimed a home office in the house. Would that impact the “investment income” stipulation?

With improvements to the home i’ve calculated my cost basis around 300k. This would mean my capital gains will be assessed around $400k. $250k would be exempt. $150k would be taxable unless i can make the 1031 work.  

Thanks for any help!