I have two separate insurance policies, one for the house, one for the ADU.
Then just make one single entry for insurance costs, which would be the total of both policies.
Not sure if this matters, as there are two separate leases, with two different tenants.
Doesn't matter really. Using my scenario, for the taxes, you'd just enter the total of all rents received from all tenants.
So I would enter the grand total of the ADU in the cost box? And not depreciate the smaller items themselves within it, such as the stove, fridge, etc.?
I'd total everything up and enter it as a single asset. I find it a waste (just my opinion) to separate things out to depreciate them faster. Many folks don't realize that depreciation is not a permanent deduction. When you sell the property you are required to recapture that depreciation and pay taxes on it in the year you sell. Two things with that.
- While recaptured depreciation is taxed at the "ordinary" tax rate, it gets added to your income and therefore increases your AGI.
- There is the possibility that the increased AGI could be enough to bump you into the next higher tax bracket. Now weather it actually does that or not, just depends on the numbers. But it's darn near impossible to predict what your AGI will be years from now when you sell the property, and you also can't predict how tax laws may change in that time.
Now I'm not saying to not separate things out if you want to. I'm just giving you my opinion on why I would not - and we all know what opinions are like.
If you do separate things out such as the appliances, you'll need to label those assets in such a way so that you know which rental property asset those other assets belong to. That will matter if something happens, such as selling one property, or if there's a fire in one property and those separated assets are also destroyed.
For me, I have a mortgage on all 3 of my rental properties. Knowing that I will have to recapture depreciation at some time in the future when I sell the property, I do what I can to keep my depreciation as low as I legally can. Even doing that, I still show a loss every single year on the SCH E.
Now for you with no mortgages, I really can't predict or even guess with any accuracy, how things work out for you each year with the bottom line on your SCH E. Maybe you show a little profit? Maybe you still show a loss? For me, if I showed a profit I'd still keep my depreciation as low as legally possible. I'd rather pay a lower tax on a little profit each yere, than risk the probability of paying a higher tax on a lot of profit in the year I sell the property. But that's me. You have to make your own decision. All I can advise is that you do your homework so you can feel comfortable with an "educated" decision for your specific and explicit situation and possible future outcomes.
This is in California by the way, if that means anything.
My condolences. 🙂 I can only imagine your tax liability as being "at least" double what I pay, since you pay both federal and state taxes. The cost of the licensing requirement (for the CRT or whatever you call it there) is probably high as a kite too.
