the clarification by you means that "some" of the information in my prior post may not be accurate for your specific situation. Therefore, I'm blanked out that post. Here's the more accurate info.
Since you are reating the ADU (Accessory Dwelling Unit) as it's own physical separate property for tax purposes and reporting rental income from it, this means you'll need to do the math manually yourself. Personally, while I know it means more work for you each year, I myself would prefer this to ensure accuracy. Since you are treating it as it's own separate property with 100% business use as rental property:
- 26% of your cost basis is allocated to the SCH E.
- 26% of all monetary numbers on the 1098-Mortgage Interest Statement are allocated to the SCH E, with the remaining 74% to the SCH A. (Boxes 1, 2, 4, 5 and 6 on the 1098) Note that the SCH E does not require and therefore does not ask for all of those boxes.
26% of the property taxes are allocated to the SCH E and 74% to SCH A.
26% of the property insurance is allocated to the SCH E and the remaining 74% can not be claimed, as insurance on your personal residence is never deductible anywhere on your federal tax return.
If the utilities are shared (meaning for example, if water use for both structures is on one single water meter) then you have two acceptable ways to allocate the utility expenses. I'll use water as an example.
If you, your spouse and two children live in your primary house, that 4 people.
If a childless couple lives in the ADU thats 2 people.
Total of 6 people using water billed through a single water meter.
Option 1:
Two of the people using that water are "business clients". So 33.3% of the water is considered business use. You can claim 33.3% of what you paid for water for the entire year as a business expense on SCH E. (keep all of your water bills in case of audit.)
Option 2:
26% of your property is business use. You can claim 26% of what you paid for water for the entire year as a business expense on SCH E. (again, keep all your bills in case of audit.)
Now in the above scenario, option 1 is the better choice. But lets say you only have one renter in the ADU. That's a total of 5 people using that water. The one renter only accounts for 20% of the water and that's all you can claim on SCH E with option 1. So in this case, option 2 would be the better choice for you.
Let me know if I can be of further help.
