My wife and I live in a Seattle in a neighborhood that allows for free standing studio and apartment rentals. Our home has both a 3 car parking pad AND a completely separate oversized 2 car garage (~600 square feet). We also have ample area to store typical garage items elsewhere on the property. We have a garage that shares a roof with our main home, but is a self standing building - there is a breezeway between the two buildings. The garage already had doorway access on two sides and windows on 3 sides. We are considering converting the garage into a studio apartment given that we don't need the garage space today, rentals are hard to come by. The garage already had electrical and plumbing to it as well. My guess is that we'd have to spend ~$20-25k to convert the garage and we could rent it for around $1400/mo. My question is about the conversion costs - can we depreciate the non-land value of the garage if it included in our current mortgage? Can we depreciate the conversion costs (materials or materials and labor)? Thanks in advance
The short answer is - yes, you can. The long answer would have to go thru a lot of details, which is best left for your CPA.
You will basically partition your property, including mortgage, taxes, and utilities, into two: personal residence and rental apartment. This blog post by @Brandon Hall gives an excellent introduction into the applicable rules.
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