Can you Use accelerated depreciation method with a house hack?

Question

Could an investor use the accelerated depreciation method in a house hack of a small multi family or a Duplex property? I understand this method is unavailable for a primary residence, but does that limitation extend to those who live in one unit while renting out another?

Craig Curelop · Answer

@Michael Plaks - I think his question makes perfect sense with the words he used. He is talking about a house hack.

@Andrew Edwards - I am not an accountant, but I have talked with my accountant about this and am currently doing it. You are able to take depreciation on any property that you are renting out. If it is a duplex and you are renting out 50% while occupying 50%, you are able to depreciate 50% of what you normally would. 33% for a Triplex. 25% for a quad. If you are house hacking a single family residence and renting by the room, the same method applies. Let's say it's a 2,000 square foot house and your room is 100 square feet. You are able to depreciate 95% of the value that you normally would (100/2,000).

As for the accelerated depreciation question, you CAN accelerate depreciation though a cost segregation study. This is most common in commercial properties, but it can be done for rather cheaply in residential. It's typically $1,000 to $2,000 to do, but will likely save you much more than that in tax savings.

Natalie Kolodij · Answer

When you house hack rooms in your house you're only allowed to depreciate areas that are EXCLUSIVE business/rental use- not any shared areas.

You kind of went into it backwards.

So if it was a 4 bedroom house, and say they also have a private bath on 1 bedroom.

Each bedroom is 100 sq, bathroom is 50= 450sq/2000 for rental use

You can't deduct your personal 100sq foot room, OR any of the shared areas like kitchen/ living room.

So you'd get to depreciate 450/2000

Kevin Phu · Answer

You provided no real reasoning as to why you think house hacking is not investing. I'm curious as to why you think it isn't.

I purchased a 4br SFR with 0% down, 0% loan fees, and $400 for a property inspection. Rented out the 3 extra bedrooms while I lived in the master. Pretty much covered all of the mortgage which significantly decreased my monthly out of pocket costs. I moved out and have the whole house rented out and cash flowing. That cash flow is being saved up to purchase another rental property.

If that's not investing, what would you call this and for what specific reasons?

Michael Plaks · Answer

@Andrew Edwards

You use big words without understanding what they mean.

On a personal residence, you cannot deduct any expenses except mortgage interest and property taxes. On a rental property, you can deduct all expenses, including insurance, maintenance, utilities and depreciation. Depreciation is a "paper" deduction in a sense that you do not directly pay for depreciation, unlike for all other expenses.

Accelerated depreciation is just a variation of depreciation and is always available when depreciation itself is available.

With a duplex, you essentially have two properties: one personal and one rental. Depreciation, along with all ither deductions, is available for the rental portion of the duplex only.

Michael Plaks · Answer

OK, you guys provoked me. :)

House hacking is not investing. No more than taking selfies is "modeling" or heating up a frozen pizza is "cooking."

Change my mind.

Natalie Kolodij · Answer

The answer is on any rental the IRS requires straight line 27.5 or 39 if commercial

A few items are allowed to be shorter like appliances, carpet, stuff not attached

but if you want to take more on an accelerated (ie faster than 27 year) timeline you need a cost segregation study

Michael Plaks · Answer

@Kevin Phu

My comment was tongue-in cheek, don't put too much into it.

But why it is not technically investing? Because the goal was not to invest, but to find a way to live in a house for free, like college roommates do. An investor has a strategy and is steadily growing his portfolio. House-hacking is a warm-up to that, at best. But really it is just a lifestyle for someone who is not yet ready to start investing. Nothing wrong with it, except the label. :)

Natalie Kolodij · Answer

If how you explained was her stance that's like 2 levels into too aggressive

Level 1 would be trying to allocate a business to personal split on shared space- which is still not really right and would be near impossible to prove

Depreciating business space you personally also utilize is 100% wrong

Craig Curelop · Answer

@Natalie Kolodij - Interesting. The accountant that I use did it the way I mentioned. She said that since a house hacker's situation is pretty unique in terms of the IRS that as long as it's justifiable, it should work? Maybe we are flirting the line here though?

Can you Use accelerated depreciation method with a house hack?

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