Tax Implications for Rehab Costs House Hacking

[Sabrina Savinski]

I am currently house hacking and occupy nearly 50% of the square footage. Our unit is also going to be the primary rental unit when we move out and will pull in the majority of the income. 

Our unit has been kind of run down by previous long term tenants. We are doing a lot of small repairs this year while we live here but I have been putting off any more expensive items until we move out, under the assumption that once we move out, we can write off the cost of those items (example, window replacement).

Is there a trick for making these major improvements now- but with the ability to write off some of the expense? Or does it make sense to just wait? 

I know with the new laws, it is easier to write off improvements in the current year, so I am inclined to wait and take the full write off next year when we turn it into a rental. But curious how others are handling rehab costs for their house hacks. Thanks!

[Ashish Acharya]

Originally posted by @Sabrina Savinski:

I am currently house hacking and occupy nearly 50% of the square footage. Our unit is also going to be the primary rental unit when we move out and will pull in the majority of the income. 

Our unit has been kind of run down by previous long term tenants. We are doing a lot of small repairs this year while we live here but I have been putting off any more expensive items until we move out, under the assumption that once we move out, we can write off the cost of those items (example, window replacement).

Is there a trick for making these major improvements now- but with the ability to write off some of the expense? Or does it make sense to just wait? 

I know with the new laws, it is easier to write off improvements in the current year, so I am inclined to wait and take the full write off next year when we turn it into a rental. But curious how others are handling rehab costs for their house hacks. Thanks!

 
Sabrina, 

The improvements that you make to your side of the unit will have to be added to the basis of the property. So you will not lose on the expenses if you make improvements. If you do repairs, its a personal expense. 

Two things:

Rapairs:

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.

Improvements:

1) Improvements made on the personal side are added to the basis of the property, but you cannot depreciate the personal side of the property until you move out. The increase of the basis will help you minimize the taxable gain when you eventually sell the house. So, basically you dont lose the money spend. 

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 the personal side, do not do repairs because they are personal. Always do improvements because they increase your basis thus reduce taxable gain in the future or will eventually increase your expense when you move out. 

B) For the rental side, do repairs because they are deductible right away and do not have to depreciate over a few years as done for improvements. Repairs do not have to recapture when you sell the house too.