I recently bought a duplex that Im house hacking, living in one of the units. its a fixer upper and both units need considerable work. at some point in the future, I'll move out and rent the unit Im living in. ive searched, without getting a clear answer, how to handle improvements to my unit. obviously at this time no expenses can be deducted, but once its converted to a rental unit, can any of the costs for improvements then be taken over time as depreciation? curious if there are smart tax strategies to get the most out of improvements? thanks!
Two things to consider before you move out:
1) Repairs made on the personal side of the duplex cannot be deducted. It is a personal expense, just like your food expense.
2) Repairs made on the duplex are deductible against the rental income.
1) Improvements made on personal side are added to the basis of the property, but you cannot depreciate the personal side of the property. The increase of the basis will help you minimize the taxable gain when you eventually sell the house or more depreciation when you convert that to rental.
2) Improvements made on the rented side will also be added to the basis, but you can depreciate the improvements on the rental side and deduct depreciation against the rental income. But, you have to recapture the depreciation (pay taxes again on what was deducted ) at the end when you sell the house.
So, a good strategy is:
A) For personal side, if possible do not do repairs because they are personal. Always do improvements because they increase your basis thus reduce taxable gain in future. Repairs are just waste when you are living in it.
B) For a rental side, do repairs because they are deductible right away and do not have to depreciate over few years as done for improvements. Repairs do not have to recapture when you sell the house too.
If the duplex is an LLC, even if its yours, can't you set up a rental agreement with the LLC and you personally as a tenant to that LLC? Can't the LLC then make repairs for the investment? Or, since its flow through entity, does it not count that way?
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