House Hacking Tax Deep Dive

[Eric T.]

Hello everyone! I just had my first successful year house hacking (2021) and had a pretty rough time figuring out my taxes and feeling confident that I was doing everything correctly. I worked alongside a CPA and asked a ton of questions, and I wanted to breakdown our strategy for anyone in the BP community that might be interested.

First, broke down my 3-2 townhome into percentages based on square footage:

I personally occupied the 13% unit for the first 6 months of the year, then had a tenant move into the 22% unit downstairs. After a few more months, a second tenant moved into the 12% unit upstairs. Once the first tenant moved in, I considered the common space to be "rented' for depreciation purposes, because of the increased foot traffic and wear and tear on appliances. I used a simple spreadsheet to identify the "personal use" and "business use" percentages on a monthly basis:

At this point, I have a clear fraction of personal use and business use for the entire year. Next, I created a cost basis for my property to use for depreciation purposes:

I determined by annual depreciation using the general depreciation schedule (divide basis by 27.5). Finally, I went to my Schedule E and annotated 365 fair rental days, then added up my home insurance, mortgage interest, property taxes, and utilities, and then multiplied all of them by 0.33 (my business fraction).

In the end, I had around a $1000 loss on the property that reduced my overall tax liability. Not a bad deal, considering I was going to be paying to live in the house either way!

Hopefully there are other people in my situation that find my example useful. For the professionals out there, I am open to your feedback! I really tried to used a logical approach and be as accurate as possible. Let me know what you all think!