One house with 3 units, each with a different tax treatment

[pavben]

Hello,

I'm trying to figure out how to enter this situation into TurboTax:

One house with an ADU that effectively has 3 units:

- Main home upstairs: Used as my 2nd home.

- Main home downstairs: In the process of being renovated/improved with the goal of renting it out when done. Not yet "in service".

- ADU: Used as a rental all the time.

Main home and ADU have different addresses. Example: Main Home at 123 Elm St and ADU at 123A Elm St.

Given the differences, I'm thinking I should treat them as 3 separate properties (one personal use, one intended rental, and one active rental). Does that seem like the optimal way to go?

I've determined percentages for allocating expenses among the 3 and have all expenses tracked per-unit, so I can produce separate depreciation schedules and expenses for each.

Also, I would like to use some of my expenses from the downstairs unit to offset income from the ADU rental, but the downstairs is not yet in service as a rental. Can I do this for some expenses, or will I need to wait until it's placed in service to begin taking deductions? It would make sense that they are part of the same enterprise and I have one project that is generating revenues while another is losing money (in investment mode) to offset those revenues, but I think I have to wait to depreciate improvements over 27.5 years and "startup costs" over 15 years starting with when the unit is placed in service as a rental. This stuff is complicated, but I feel like I'm not too far from understanding the basics.

Thanks!

[AnnetteB6 · Accepted solution]

You are on the right track.  When entering the information into TurboTax, treat it as three separate units.  That will give you the most flexibility when it comes to reporting the income and expenses and making changes in the future.

You should not use any of the expenses from the unit 'in-progress' to offset income from the unit that is currently rented.  That would not be keeping them separate from one another.  You will need to wait until the 'in-progress' unit has been placed in service by being advertised and available for rent to deduct any expenses related to it.  Your renovation costs will be added to the basis for depreciation for that unit.