Accessory dwelling unit just built

[codad4x]

I own a single family house which I have rented to tenants for many years.  In 2022 I built an ADU (Casita) on the back of the property, which will have separate tenants.  I have entered the ADU info in Turbotax as a new asset of the original property, as opposed to a separate property.  For the initial cost of the asset, I was planning to take the construction cost plus all the landscaping, furnishings, supplies, etc.  Then I am asked for the cost of the land, which I entered as $0, since it was the same land the original house sits on.  Does all this sound correct, or is there another way I should be adding this new building, land, and furnishings?

[PatriciaV · Accepted solution]

It depends. If the ADU will have separate income and expenses, you may wish to enter this as a new rental property. This treatment will simplify your recordkeeping and eliminate the need to allocate costs between the two rental units. Also, you may have a different number of rental days for each property, which is a factor in some calculations. Although it's a rare event to sell an ADU separately, setting up a new property now could save you headaches later.

It's not necessary to report land cost for a rental property since land is not depreciated. Just remember how you reported the basis for the property if/when you do sell it. 

[codad4x]

Thanks for your reply!

If I report the casita as a new property, it will definitely help me in terms of allocating costs and income.  Both units are similar, but not identical in size (650 sq ft and 890 sq ft).  Is it okay to divide the shared costs by 2, including property taxes, insurance, landscape maintenance, and shared utilities?   The rent charged is the same, since the smaller one is the new building (nicer inside!).

When I sell the property, will this complicate the tax calculations?

[ThomasM125 · Accepted solution]

It is probably OK to split the shared costs equally, being that the square footage is not much different. Also, you will be combining the net income or loss of the two units when you report it on your form 1040. The main consideration when you sell the property will be the orginal cost and the depreciation on the properties, which will be unaffected by the shared costs. So however you divide up the shared costs it should not make a difference when you sell the properties.