In a couple of months, my wife and I will be closing on a duplex we plan to house hack. I understand that we can only claim 50% of the deductions while we're house hacking. My question is how to handle the depreciation for the duplex? We'll be living in the duplex definitely for the required one year, but it could be longer. So for the first year that we'll be claiming depreciation do we only claim half of the duplex's basis? So let's say the basis for the whole duplex is $300,000, do we only claim $150,000? That part seems to be logical to me, assuming we claim the $150,000.
What I'm really wondering is how we handle the depreciation once we move out and rent the other side. I was thinking while we're still house hacking and only have half the property rented that I would list the property address on the Schedule E as 123 Main St #A (the rented side) and then claim 50% of any expenses and 100% of the depreciation for the building with the starting basis of $150,000 (since the whole building basis is $300,000). But once we stop house hacking, do we add the other half of the duplex onto schedule E as 123 Main St #B and then start claiming the other half of the depreciation as of the date it's put in service or is there something else that needs to be done to list the duplex as one whole unit again or going forward will we have 2 separate entries for the duplex on our schedule E and Form 4562 since the 'date acquired for service' are different dates? Would adding the other half of the duplex for depreciation, after house hacking, be like adding it as if we'd had building improvements made that particular year?
I hope this makes sense as it's being read? Maybe I'm just overthinking how the depreciation will be handled after house hacking? Any thoughts on the subject would be appreciated!
First, you have to carve out the value of the land from your 300k. and then you allocate the basis based on any reasonable method ( square footage).
When you move out, you necessarily dont have to separate out by the units. You can combine all the rentals income and expense into one activity, but when determining the depreciation expense on your books, you can start a new depreciable asset account for your second unit with whatever the basis would be when you place it in service ( lower of your adjusted basis or the FMV). The adjusted basis might necessary not be the same as your other unit alreay rented becuase you might have done some work after you bought it.
You can combine the depreciation expense into one number and report it as one activity. Hope that makes sense.
@Ashish Acharya , I am aware that we have to deduct the land from the building basis, I was just trying to simplify my question. :-) I appreciate your advice & quick response!
Househacking can definitely make your tax return more complicated.
I think you got some good advice from Ashish.
I agree with ashish that you want to keep the duplex under 1 property on schedule E. Otherwise you would need to split the mortgage interest, RE taxes etc. You need to do a little more work if you separated the properties.
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