Duplex as Residence
I purchased a duplex last July and spent 2 months remodeling the side that I live in. I was told when I bought it that improvements would be tax deductions. Then I find that "improvements" may only be depreciable as part of the basis of the property.
Any insite on how to handle these expenses.
Also, I intend to rent both sides eventually, anything I should know about the conversion from primary residance to rental.
Thanks.
jlatte,
In effect, you have purchased two properties -- your primary residence and an investment property -- even though this is a duplex and only one transaction actually occurred.
The half of the duplex that is your primary residence is not eligible for depreciation because the IRS does not treat your primary residence as an "investment property"; instead, it is your personal residence. Any improvements to your personal residence are not deductible either, but are added to your cost basis.
Furthermore, you may not assign a "cost" to your own time and sweat when you total your remodelling costs. Your time and sweat are free contributions to your remodelling effort; only the actual cost of materials will be allowed for work you do yourself.
For the other half of the duplex -- the investment half -- you may depreciate the property, you may take deductions for the cost of maintenance and upkeep, and you may use those expenses to offset your rental income. As is the case with your primary residence, capital expenses (improvements) are added to your cost basis for the investment property. But unlike your primary residence, the cost of capital improvements may be depreciated over the asset life of the improvement.
jlatte:
DaveT is correct. I would only add one point for clarification. Although the improvements you made to your half of your residence are not currently deductible, must be added to your basis, and are not depreciable while you live in the property as your primary residence, when you convert your residence to a rental property, you can start depreciating your cost basis over 27.5 years, thereby giving you some deprecation deductions each year.
DaveT's post essentially says this, but I thought I would make it a little more clearer if you are not familiar with tax issues for REIs.
Taxjunkie