Does Depreciation Work With a House Hack?

Question

If I buy a 3-flat in Chicago and live in the top unit, can I depreciate the entire building normally as I would as if I was an investor who did not live in? If not, would I be able to depreciate 2/3 of the building?

I'm trying to decide between 2 options:

1) live in for 2 years and then sell within 5 years, to avoid paying capital gains

2) live in for 1 year, keep as a longterm rental, and then buy another place to house hack in

Any advice/recommendation on this decision?

Dave Foster · Answer

@Satish Subramanian, if you sell after two years, only the portion of gain allocated to the one you live in will be tax free.  However you an also combine with a 1031 exchange on the other portion and get tax deferred treatment that way.

And as @Mark Gauger said, the residence portion does not have to be consecutive but you do have to have lived in that property for 2 out of the 5 years prior to sale.  So you could also live in it for 2 and then move out for 3 as long as you had it sold prior to end of the 5th year.

In any event you cannot depreciate your primary residence portion.  After you move out depreciation allowance does kick in.  And if you sell later and take the primary residence exemption you will have to then recapture the depreciation taken on that unit.

Mark Gauger · Answer

@Satish Subramanian You can't depreciate the part you live in. If all 3 units are the exact same, then while you were living in one unit you would be able to depreciate 2/3 of the building. If they aren't the same, then you'd determine what % of the building you're living in and depreciate based on that. For example if unit A and B are 1000 sqft each, but unit C where you're living is only 500 sqft, then you would depreciate 80% (2000/2500). It would probably be worth your $$ to meet with an accountant to maximize deductions (and make sure you're not claiming something you shouldn't).

Why not live for 2 years and then move onto the next house hack? You can decide before the 5 years are up if it makes sense to sell or if you'd rather keep as long term rental. Or leave after 1 year but move back in later for the 2nd year if you do want to sell. Two out of 5 doesn't have to be consecutive. Or move out after 1 and plan to 1031 exchange in the future. Lots of options, but what's your long term strategy?

Does Depreciation Work With a House Hack?

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