Investors & landlords

I've included some additional clarifications for you at the end of my post here.

So once the ADU is ready to be rented or a tenant rents it out, can I depreciate the ADU?

Yes. But understand when depreciation starts. The depreciation starts on the first day the property is "available for rent". Not the first day the renter moves in. So basically, it starts when you place that "for rent" sign in the front yard. Doesn't matter if it takes you three months to actually get a renter in it. So long as "YOU" don't utilize the property for personal use, depreciation starts when it's available for rent.

There's two basic dates you'll deal with on this. First, is the date of acquisition (or completion of construction in your case). This is referred to as the purchase date or acquisition date. The 2nd date is the "in service" date, which is the first day the property is available for rent.

what’s the depreciation amount I should enter?

The information provided here is specific to your case, and your situation *only*. It may not apply to anyone else that may be reading this thread.

As I understand it, we're talking about a physically separate structure that may or may not be attached to your primary residence. What you will need to do is a bit of allocation. If what you will be renting out is what you paid 150K for and you will not be renting out any more or less than that, then your structure value will be 150K. Then you will need to allocate a percentage of your land value too. Here's a sample example.

I purchased my home in 2003 for $100,000. I have never rented it out. At the time of purchase/acquisition the structure value was $70K and the land value was $30K. In 2019 I added on to my house another living structure that was composed of a bedroom, bathroom and kitchen. This addition cost me $50K.

Prior to the addition the total square footage of my structure was 2500 sq ft. After the addition the total square footage of my structure is 3500 sq feet. That means the new addition of 1000 sq feet is 1/3 or 33% of my total square footage. Therefore I will allocate the total cost of $50K I paid for the addition to be rented out to the "structure" portion. Then I will allocate 33% of my land value to the "land" portion. 33% of the land value is $10K. So on my rental when entering it into the TurboTax program in the "COST" box I will enter $60K and in the "COST OF LAND" box I will enter $10K.

Got it? If not I'll try my best to explain it better. This will be tricky for you because you are renting out "A part of" your primary residence and it will be very, very easy to get confused without even realizing you're confused. Especially when you get to the allocation of property taxes, mortgage interest and the such.

If you have a separate mortgage that is for the addition only, and if you get a separate 1098 - Mortgage Interest Statement for that loan, then it's all deductible. But the property taxes will be a different story since those will have to be split between the SCH E for the rental portion and SCH A for the primary residence portion. The split is based on percentage of property that is actually allocated to the rental (including the percentage of land). That means some manual math on your part, as the TTX program can only do so much.

I've been doing "the rental property thing" for going on 30 years now and have learned a lot of lessons the hard (and c ostly) way. It's my hope to help others such as yourself avoid the pitfalls that at times almost consumed me. Now here's that additional information I promised.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence before, then this date is the day AFTER  you moved out.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.