We spent $40,000 to restructure our house (basically combine two bedrooms to an airbnb unit). I assume I use form 4562 to report the start of depreciation of these capital improvements. If so, I was wondering how to fill out Part III. ie. I guess I use "h. residential rental property", but at what recovery period? (27.5?)..and what convention and method. Any help would be greatly appreciated..
Hi @Glenn Cosburn Congrats on your first post and welcome to BP!
The recovery period for residential rental property is indeed 27.5 years. I believe it's a mid month convention and straight line method.
The $40K in improvements will be depreciated, but also the existing portion of the house that is now the airbnb unit would also be depreciated.
For something like this that's about as complex as you need to get. The truth is there would be assets that would qualify for accelerated depreciation over 5 years (possibly though unlikely 7 year or 15 year too) in there as well, but figuring out what qualifies is complicated.
Don't even try to complete 4562 by hand. It's not worth the grief and the resulting errors.
When you use tax software, you will simply pick up a type of asset from the drop-down list (for example "residential real property") - and the software will complete 4562 for you the right way, as well as carry it to all other connected forms.
Would also recommend not lumping it all together as $40k. There is a tax rule called de minimis, stating any improvement under a certain threshold can be taken off as a repair instead. Think through how you go about defining capital expenditure vs repair, as this may come to bite you taking all as capital expenses (depreciation recapture upon sale, whereas repairs have no recapture). Obviously structural is capital expenditure, but if you replaced old windows (repair) or paint (repair). Linens/furniture would go in its own bucket as furnishings and be written off a different way. I’d work with a CPA on this as the Airbnb rental can be worked 2 different ways on a tax return. You can use the standard rental income form or I believe IRS prefers it to be taken as self-employment income (schedule e / schedule c) which if is a loss, can be deducted off your regular income, however if positive may incur paying more. There are a lot of factors to consider, and I would recommend flushing out the taxes with a CPA the first year to make sure you sent everything up correctly and don’t leave any money sitting on the table.