Question on depreciation on rental to primary residence

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Question on depreciation on rental to primary residence

Jason Vaughn
Investor · Tacoma, WA · Member since 2016 · 34 posts · 3 votes
So my fiance and I bought a duplex as a house hack a few years ago. Last year the tenant we inherited moved out and we completely renovated their unit and got another tenant in it. I am thinking once that tenant moves out, we will possibly move into there unit and completely renovated our unit but wondering how that will affect our taxes. If I understand depreciation correctly the renovation is being depreciated at 1/27.5 a year. If I move in for a year then move out in a year or two does that just put depreciation on hold or does it cancel it completely from then. I would rather renovate a rental and be able to take the depreciation instead of renting my primary residence unless I am missing something.
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Carl FischerPro Member
Rental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
8y

@Jason Vaughn

Check with the accountants on BP

@Lance Lvovsky @Ashish Acharya @Michael Plaks @Brandon Hall very good answers from all of them. 

I think you have it right. You can depreciate rental property but not your primary residence. What can be accounted for, property “in service “dates, etc is better coming from the experts. I would look at these CPAs and get at least one on your team. They will help you make smart decisions and avoid mistakes especially with the new tax laws. 

[email protected]215-283-2868
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  • Carl FischerPro Member
    Rental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
    8y

    @Jason Vaughn

    Check with the accountants on BP

    @Lance Lvovsky @Ashish Acharya @Michael Plaks @Brandon Hall very good answers from all of them. 

    I think you have it right. You can depreciate rental property but not your primary residence. What can be accounted for, property “in service “dates, etc is better coming from the experts. I would look at these CPAs and get at least one on your team. They will help you make smart decisions and avoid mistakes especially with the new tax laws. 

    [email protected]215-283-2868
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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    8y

    @Carl Fischer , thanks for the mention. 

    @Jason Vaughn , very smart with that strategy.  

    1) When you stopped renting out rented side of the duplex, it is converted to personal use. At that time of conversion, the "adjusted basis" of the property for is  - your original basis - a depreciation that you already took,  

    So when you go rent it out after moving in and renovating it, the depreciation starts over27.5 years but with the adjusted basis ( or FMV if lower). The adjusted basis for you is the basis that you paused depreciating mentioned earlier.

    2) When you converted the rented portion to personal use, there is no gain/loss or depreciation recapture, but when you dispose of the property, both depreciation ( before  personal use and after)  will be recaptured. Keep track of both. 

    In general, I would suggest repairing the rented unit when it is rented now because once you move in to renovate, yes the improvements are added to the basis, but repairs are not ( there is one exception) 

    Although there is a rule that when you are improving the personal residence and there are minor repairs done with the improvements, those repairs can be added to the basis, but you would benefit more doing the repair now while it is rented to get a tax deduction right away rather than adding to the basis. 

    Let me know if I confused you more. Good luck. 

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  • Jason Vaughn
    OP
    Investor · Tacoma, WA · Member since 2016 · 34 posts · 3 votes
    8y

    Thank you both, but let me see if I understand this correctly @Ashish Acharya. So lets throw some #'s at this and for now lets ignore the fact that it is a duplex and lets just say a SFH. Let say:

    Bought  for 100k in 2015 and rented 2015-2018. Lets say land was worth 50k and home worth 50k. so during those years we depreciated for 1818 per year so value at 42.728 +50k land = 92,728 at end of 2018

    Plus in 2017 we spent 10k renovating the unit so depreciating 10k for 2 yrs =9272.8 

    Is this then added together to determine total value of 92728+9272=102000? 

    Lets say I then live in the unit for 2 years then rent out again? I would start at 102k again, say 52k for house and 50k for land. Lets say we rent for another 3yrs then sell so the depreciated value is  44327+50k = 94437? Is that correct? 

    Also am I correct that you can only depreciate the Home not the land? 

    Also how are land/ home values determined? Total value and percent of property that is land compared to percent that is the home? 

    Also how does this compare to say just taking your primary and making it a rental after. Looking at it the major benefit has more to do with the immediate tax deduction repairs instead of the depreciation of the renovations.  If wanted to do major renovations and not repairs does it make much of a difference? 

    If I bought a unit for 100k lived there for a few years renovated it and with market appreciation it is now valued at 125k when I turn it into a rental. Do I use the original price or the new market value? or new Tax value? 

    Sorry for all the questions.

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    8y

    @Jason Vaughn ,

    Numbers are just confusing me as well. 

    Yes just the home is depreciated.  Most of the people use the value allocated to the property tax documents.  You can use the same ratio, if you believe that is wrong you can allocate price but have to defend if audited. 

    "Also how does this compare to say just taking your primary and making it a rental after. Looking at it the major benefit has more to do with the immediate tax deduction repairs instead of the depreciation of the renovations. If wanted to do major renovations and not repairs does it make much of a difference? "  Can you clarify this. I dont understand this.

    The depreciable basis for tax purpose is your lower of you adjusted basis or the FMV.

    If it is easier, we can have a quick call.  PM me

    [email protected]941-914-7779
    INVESTOR FRIENDLY CPA®5241 Reviews
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    TaxMD® | Tax Planning Software
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