Oconomowoc, WI · Member since 2016 · 10 posts · 3 votes
Hello BP community, I am looking to buy a single family home and was wanting to know, if i rented to my fiance, while I am living there as well, can I claim the home improvements as a tax deduction? I would look to do the work myself so did not know 1) if this is legal when it she will become a family member as I have read that you can claim the % of the rental as a deduction when renting 2) If now that I am renting I have entered into the area where i will need to hire a professional contractor to do the work? Thank you and let me know of details that need to be filled in to get the best response!
Rental Property Investor · Malvern, PA · Member since 2016 · 1k+ posts · 936 votes
9y
It would be legal if you were not living there up to the point you get married. Once married, it is self-dealing and your deductions would not be allowed.
CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
9y
Great strategy and one I am currently using. You can do all the work yourself and the cost of materials will be either deductible or capitalized, however, you'll have to pro rate it against the rental portion of the home.
Since your fiancé is not legally married to you, the rent she pays is considered rental income and you are then allowed to deduct a potion of your costs associated with the rental portion of the home. However, you need to make sure that the rent she pays is fair market rent. Maybe you price the rent per room instead of the entire unit, but she needs to pay fair market rent in order to avoid IRS scrutiny.
This is like a house hacking situation, but on steroids because you're likely sharing a room. In a house hacking situation, the ratio of rental-to-personal use is easy to calculate (since you wouldn't be sharing a bedroom) however in your situation it's tougher. I think you'd be fine sticking with a standard 50%. This means that 50% of the home's basis, expenses, repairs, and improvements should be on Sch E while 50% of interest and taxes should be on Sch A.
Any improvement costing over $2500 will most likely be capitalized and depreciated.