Depreciation on a low cost multi unit...

[Benjamin Paul]

I bought a single family two years ago for 70k with the intention to live in flip.

In the process of renovating I realized it could become a three unit and began reading about the tax benefits of rental real estate and depreciation. 

After repair and conversion the property with be worth about 325k in todays market and rent for between 3 and 4k per month. However i have done most of the work myself and will have a cost basis of less than 150k (of which one third will be land).

i would love to have this as a rental but fear the numbers will not be worth the taxes caused by the low depreciation I have available vs the fair market value (though my income is under 40k). Especially as I could sell outright and pay no tax through the primary residence exemption.

Is there a way to reset the cost basis? Sale to another entity and finance? Cost segregation? Front load depreciation and then 1031 exchange?

[Joe Splitrock]

Originally posted by @Benjamin Paul:

I bought a single family two years ago for 70k with the intention to live in flip.

In the process of renovating I realized it could become a three unit and began reading about the tax benefits of rental real estate and depreciation. 

After repair and conversion the property with be worth about 325k in todays market and rent for between 3 and 4k per month. However i have done most of the work myself and will have a cost basis of less than 150k (of which one third will be land).

i would love to have this as a rental but fear the numbers will not be worth the taxes caused by the low depreciation I have available vs the fair market value (though my income is under 40k). Especially as I could sell outright and pay no tax through the primary residence exemption.

Is there a way to reset the cost basis? Sale to another entity and finance? Cost segregation? Front load depreciation and then 1031 exchange?

 The primary residence exemption would only apply to the unit you occupied. If you are selling a triplex, 2 of the 3 units are investment property so they would not be protected from capital gain taxes. There are different ways to split the gains, but using square feet is the most common. If you never rented the other two units, it may be hard for the IRS to know that that part of the building was investment property. 

Bottom line, you were able to create value (profit) and the IRS will want to tax that profit. Assuming you have $150K into the property, you should have plenty of cash flow to set aside and pay taxes. The other option is sell it and hope the IRS doesn't notice the conversion.