In-law Suite or Duplex?

Question

I just purchased a 1950s ranch that has a 1 bed 1 bath in-law suite attached on the side. It’s got a separate electric meter and separate gas, it does share the same water.

I’ve ran into issues with the home warranty because they don’t cover in-law suites but they do cover duplexes.

I’ve also seen that you get certain tax breaks for owning a multi family property over a single family.

I’m planning on renting out the second unit as a short term rental. My question is, should I petition to get it zoned as a duplex or leave it as is? Are there major advantages to be a duplex instead of sing family with an in-law suite? I imagine changing it could affect my mortgage and insurance as well but want to explore all options and make the best practical and financial decision.

Anna Laud · Answer

@JJ King

Hi JJ!

As far as the property tax implication goes, you're talking about two attached structures, therefore should be one parcel- not having two sperate tax bills it seems.

I'm a little confused as to how this was worded- if you're planning on being owner occupied on the one side and having the STR on the other, or if you're thinking of having a long term tenant on one side with a STR on the other.

I'm not sure what the benefit would be to have a long term and both term rental both, over having the same of each- it seems like you would have more PM overhead than would be worth it as usually PM's for STR cost more  than long term rental PMs- there's simply more work involved.

If you were doing owner occupied on one side, this would make more sense to me- or if you were planning manage yourself on the SRT.

I would probably revisit the home warranty company as well and make sure they understand it's an attached structure and they aren't thinking along the lines of a converted pool house etc. that isn't attached.

As far as your insurance goes- the conversion would need brought to their attention as well as your lender's.

I'm coming from the POV of having this situation personally - while I don't have a mortgage, I do have a 'mother-in law' quarter's to the Northeast wing of the house; attached yet separate driveway, entrance, HVCA etc. Having said that however, I'm using one insurance policy, paying one parcel of property taxes, etc.

I would say that it may pay to have another home warranty company give you quotes and make sure they realize this is an attached structure- it doesn't seem like this is accurate in not covering; what would happen for the end user that wasn't using this for income generating, but simply an extension of their square footage?

If you do run into this being a more duplex only situation as far as the home warranty goes, that may very well play into your decision obviously.

You will need to let your mortgage company know as the terms of the loan product could be dependent upon  owner occupied use or that of SFR rental alone, and you don't want to have anything come up there. This is the same for your homeowner's insurance as well.

I think once you verify with your home warranty company (ies) on coverage, home owner's insurance, lender and get hard numbers as far as PM's go (unless self managing), you consider the possibility of having a less desirable rental (if mixing long term and STR both- long term renters wouldn't usually want to have short term renters attached/that close by), your decision should be more easy to make based on numbers alone.

Hope that helps some!

Anna Laud · Answer

@JJ King

Hi JJ!

Yes you're probably right about speaking with another company and seeing what they have to say as it seems like one foundation or slab should cover all attachments to the dwelling. The term in law suite may have thrown them off- I suppose had the wording 'bonus rooms' been used, it might not have been an issue for this rep. Good news is, that's going to be pretty easy to clear up it seems.

The other portion of your question and getting down to the tax benefits of it are going to be best addressed by a CPA yes, as you're going to be going off of a % base or SqFt base and it sounds like it isn't a true 'duplex' equal down the middle in terms of sizing- to then split your deductions 50% down the middle would fall into the real of we don't go there and mess with Uncle Sam that way and stay out of trouble. You do need to verify with a pro on the amount you'll be able to right off as expenses vs income etc. this way. You're likely ahead on capital gains as owner occupied goes, but the actual breakdown in terms of % you need to be clear.

As far as zoning goes- maybe not as big of a benefit there as you're not building it into a duplex, it's already there. You can easily call your local zoning board and ask a hypothetical question of 'say one had a SFR they wanted to turn into a duplex, what would the tax implications for this be" to verify on the property taxes.  In my book you're already ahead being 'one parcel' however now.

I think meeting with a CPA would be best and they may very well advise you not to mess with the zoning on an attached structure that's already there.

Hope that helps some = )

JJ King · Answer

Thank @Anna Laud for the detailed response. I should have been more clear. I'll be living in the main house and self-managing the in-law suite as an STR. (I managed 60+ Airbnbs in a past job) I agree, it may make sense to check out some other home warranty companies. This home warranty was chosen by the sellers and came with the house but it may make sense to go with another company that covers the second unit. They got hung up on the term in-law suite. They did mention if it was in the confines of the main foundation it would be covered but not if it was an in-law suite. So I think it could be that rep and also the specific terminology.

In terms of zoning and taxes, I was thinking more along the lines of deductions and income tax. I read that if you have an owner-occupied duplex you get both homeowner tax benefits and investment property benefits. I realize this may be a better question for a CPA but wanted to throw it out there and see the community's thoughts.