ADU Questions

[krpaschall]

I have an ADU apartment in a detached garage. I have one mortgage that covers the entire property (home + garage/ADU) and the city issues one property tax statement. It was rented all of 2020.

What are the different tax ramifications if the ADU is considered a rented space in a single family home vs a multi family duplex?  

Another complication, I had to refinance the mortgage in 2020 to drop my ex husband from the mortgage & title.  I need advice on how to enter in the information for the mortgage, refinance, insurance, property taxes and expenses. It seem like there are different strategies if the ADU is rented space in the family home vs multifamily duplex.  

[RayW7]

When it comes to entering the information in TurboTax, one option is to treat the rental as a completely separate property and value the rental structure using the percentage of total square feet method.  If the rental space is a separate structure for a single family then it would prorated and be treated as such on schedule E.

For those expenses that are shared (property taxes, insurance, mortgage and refinance) you'll split them using the same percentage as you will do for square foot proration.

Note: Your insurance company may have you take separate policy's for the rental area. If they do then you would list only the insurance for the ADU and not prorate that expense.

[Carl]

What are the different tax ramifications if the ADU is considered a rented space in a single family home vs a multi family duplex?

There really is no ramification tax-wise. Treating it as "I rent out a part of my home" just uses different math to obtain the same results you would get if you treated it as a physically separate rental property.

But which is easier/best depends on the setup.

For example, if the detached ADU has it's own physically separate metered utilities and you elect to treat it as a physically separate rental unit, the only thing you're dividing manually are property taxes, mortgage interest and insurance.   Otherwise, if utilities are not metered separately then depending on your selections, you'd have to split everything manually. There's also more than one way to split those utilites, and you can only split them if they are actually being shared with the tenant. For example, if the tenant does not utilize your Internet access, or use your cable TV hookup, you can't split/share those expenses.

Also, when it comes to a land line telephone, you can't share the expense for that either if you only have one line. Doesn't matter if you actually share it or not.

But if done correctly, one way has no real worth while tax advantage over the other way. You can always figure it both ways to see which is better for you.