Tax Implications for Moving out of My Owner-Occupied Duplex

10 Replies

I currently live in an owner-occupied duplex and will be moving out next year and then renting my side. I have some questions and am double checking what my accountant has done so far.

1. My side is 3 bedrooms. I have the 1 downstairs basement bedroom and my 2 roommates have the 2 upstairs bedrooms. Is it correct that I can only write off 1/2 of the expenses on my side? In my opinion I don't see why I couldn't write off 2/3 of my expenses since I'm only 1/3 of the people here and have 1/3 of the space?

2. What happens to the depreciation schedule for my property when I move out? I paid $160k for my duplex ($124kish building and $36kish land). Currently since I live in 1/2 of the duplex my accountant is depreciating it Straight Line 27.5 years at $62k (1/2 of what it would be for a straight up rental). When I move out would this then convert back into $124k?

3. What would happen to capital improvements like a roof when I move out? Would those also convert back into the original cost instead of only being able to write off 1/2 the depreciation?

4. What are the depreciation schedules for landscaping (rock and matting) and windows? I've seen multiple sites say 15 years but I've also seen some that say 27.5 years for the windows.

Thanks!!

1.  You live in one half (downstairs) while your roommates share the other half (main level).  If the square footages for the downstairs area and the main level are the same, then your accountant is correctly allowing one-half of expenses for the entire building, such as yard maintenance and roof repairs.   Any costs incurred exclusively for your rental half (painting, repairs, etc.) are 100% deductible as rental expense, while those same expenses for your residence unit are non-deductible personal expenses.  Capital improvements to the entire building (such as a new roof) are allocated 50% to the rental unit and 50% to the residence unit and the basis for each half is adjusted accordingly.  Only the residential half of the improvement cost for the roof is depreciated on a new 27.5 year depreciation schedule.  

2.  When you move out, you continue depreciating the rental half of the duplex on you currect depreciation schedule over the remainder of your 27.5 year timline.   You will start a new 27.5 year depreciation schedule for the $62K depreciation basis you have in your residence unit beginning on the date you convert your residence unit to a rental.   Run the depreciation schedules concurrently; do not combine the basis for each unit into a single deprecition schedule.

3.  See response to #1 and #2.  The residential unit portion of the new roof has already been added to your residential unit cost basis.  When you convert your residence to a rental, begin depreciating your adjusted cost basis (which already includes the roof replacement) on a new 27.5 year depreciation schedule.

4.  Landscaping improvements have a 15 year class life.  Major structural components of the dwelling structure (roof, windows, HVAC, water heater, etc) have the same 27.5 year class life as the dwelling structure itself.

Sounds like your accountant is on top of everything.

It sounds like you only own half the duplex, and are renting out rooms from your side, is that true?

Hey @Brian Schmelzlen , I own the full duplex. Both sides are 3 bed/2 bath. One side is rented. The side that I live on I live in 1 bedroom downstairs. My 2 roommates live in the 2 bedrooms upstairs; 1 is their bedroom and 1 is their office because they work from home.

For my clients, I would divide the property up by square footage. If both sides of the duplex are the same square footage, 50% makes sense. However, you do get to deduct some of the rental expenses from the side you live on if you have renters living on that side. How I would do it is determine the square footage of the space that is exclusively theirs (the bedrooms), and add to that 2/3rds of the common space. I would then divide that number by the total square footage on your half of the duplex. That way if the IRS questions it you had a methodology.

Thanks for the awesome response @Dave Toelkes ! Just to be 100% sure: Let's say the roof was $5,000. The accountant should have done $2,500 for the rental side and $1,250 for my side. Once I move out, the $2,500 for the rental side won't change. However, my $1,250 side will convert back to say $2,400ish (The original $2,500 cost minus say $100 in depreciation) which I will depreciate over a new 27.5 year life. Is this correct?

@Kyle Seidel My very first question would be - do your "roommates" pay you rent or you are super nice guy that let them live with you for free?

Assuming they pay you rent and bedrooms on your side are equal (1/3 + 1/3 + 1/3):

  1. You should be deducting 2/3 for your side, not 1/2.
  2. Oh, boy... it's possible that you should have been depreciating $103k, and not $62k, depending on what the intent was when you purchased the duplex, when you listed it for rent, and so on. When you move out and convert the whole duplex into rental, your additional basis for depreciation will have to be calculated based on lower of cost or market value when you move out.
  3. Might depend on market value, but normally be added to your basis so you should be able to depreciate.
  4. Landscaping - might or might not be able to depreciate. Rock and matting sounds like cost of land, and cannot be depreciated.  Windows - 27.5 years.

Feel free to reach out if you want to talk.

Thanks @Vlad K. ; I was thinking it should be 2/3 as well. Another issue I see here is my accountant only was depreciating the building on my rental side and not my side. How do I go about adding in depreciation back from 2015 and 2016 or should I just start the 27.5 year depreciation for this year?

Also: Let's say the roof was $5,000. The accountant should have done $2,500 for the rental side and $1,250 for my side. Once I move out, the $2,500 for the rental side won't change. However, my $1,250 side will convert back to say $2,400ish (The original $2,500 cost minus say $100 in depreciation) which I will depreciate over a new 27.5 year life. Is this correct?

You certainly can amend your tax returns, but amended tax returns receive higher scrutiny from the IRS. That may be fine, especially since it sounds like you are doing everything right, but if it’s a relatively small tax savings I would just start depreciating the allowable portion of your side in 2017.

@Kyle Seidel to add depreciation back from 2015 and 2016 you would have to file amended returns for those years, otherwise you lose the deduction and when you sell the property you would have to adjust the basis as if you took the depreciation. 

For the roof: it sounds like original cost should have been allocated as 5/6 to rental and 1/6 to personal.

When you convert to 100% rental, your 1/6th of the roof cost will be inseparable from the basis, and will be part of market value analysis:

 - your personal 1/6th of the property (excluding land) is $21.5k (1/6th of $124k + roof $5k = $129k total)

 - your personal 1/6th of the land is $6k (1/6th of $36k)

 - total cost of property & land at purchase $160k + $5k roof = $165k total

- say you move out and FMV then is $170k - your basis for 1/6th is ~$21.5k, plus land $6k

- say you move out and FMV then is $150k - your basis for 1/6th is reduced to ~$19.5k, plus land ~$5.5k (using same ratio)

Hope this helps.

Thanks Brian and Vlad!

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