Owner-Occupied
This might be a silly question, or one that has been answered already, (just couldnt find it) but...
My wife and I are done with renting on campus. We are in the middle of purchasing a 4 plex and we will live in one of the units. Are all the things that I buy for the property (tools, lawn equip., etc.) tax writeoffs? Even though I am living there? Please respond if you actually know and not guessing with me. lol Thanks in advance.[ Edited by sKauGhTiEe on Date 05/19/2004 ]
Yes if you are talking about expendable or consumable supplies. If you are talking about durable goods, then the answer is "Not exactly".
For our discussion about durable goods, let's just consider a lawn mower. Certainly this is a piece of lawn equipment you might consider purchasing to maintain the grounds.
You may be thinking of expensing the full cost of the lawn mower against your rental income. Sorry, but this is not allowed. The section 179 expensing rules do not apply to a passive income activity such as rental property operation.
Instead, you capitalize the cost of equipment purchased to maintain the property. Then you recover the cost through depreciation over the recovery period allowed for the equipment class. Since you will be occupying one of the four units as your primary residence, only three units will be in service as rentals. Only three-fourths of the lawn mower is eligible for a depreciation expense. The other fourth is considered a personal expense and is not depreciable.
I have a harder time with tools. I tend to lump all tools into the personal expense category. My thinking here is that you might purchase a screwdriver to make some repairs in your property, but the screwdriver has a use away from the property. When you sell the property, the screwdriver will stay in your toolbox rather than staying with your property.
Other things that you can expense are expendable or consumable supplies. For example, light bulbs that you use to replace the burnt out bulbs in your rental units are a supplies expense on your Schedule E. Light bulbs for your residence unit are non-deductible personal expenses. Same with cleaning supplies -- deductible expenses when used in the rental units, non-deducible for your personal residence.
Other major expenses such as your mortgage interest, hazard insurance, and property taxes are assessed for the entire building. You allocate three fourths of these expenses to the rental property units and take the appropriate expense deductions on Schedule E. For the portion of the property taxes and mortgage interest allocated to your residence unit, you take a personal deduction on Schedule A (1040) but only if you itemize your deductions.
The portion of the hazard insurance premium allocated to your residence unit is a personal expense and is not deductible.
Consult your CPA or licensed tax advisor for specific details.
Dave,
What if he buys the four flat in the name of a sub-s corporation and pays rent to the sub-s on his unit? Does he get around seperate accounting for his personal unit?
The short answer to that is yes. However you will lose the ability to deduct the mortgage interest portion off of your personal income. Oftentimes with deprecation rentals properties will show a great loss. Not all of this loss is necessarily allowed to offset your other sources of income.
commercialking.
Let me piggyback on myfrogger's response.
Let's assume that sKauGhTiEe formed a S-Corp to hold title to the property and manage the rentals. The rent that sKauGhTiEe pays for his unit is income to the business and a personal housing expense for sKauGhTiEe.
At the end of the year, when the business income is distributed to sKauGhTiEe, the income is taxed to him at his ordinary income tax rate and he is also subject to self-employment income taxes.
sKauGhTiEe would have to run the numbers to see which ownership approach nets him more after tax income.