Basis for an primary home and ADU

[tax-novice2]

I bought my property about 10 years ago and recently remodeled by adding to the main house and also an ADU. Plan to rent both the ADU and a part of the addition. How do I calculate basis to depreciate?

I have various data points

1. new county assessment

2. my insurance replacement cost assessment

3. the dwelling portion of re-finance appraisal

4. previous county assessment+ cost of construction

Out of these which ones should I use as a basis? Since I am renting only a part of the house how do I calculate the basis for that?

[Critter-3 · Accepted solution]

NONE of those are used ... your basis equals the purchase price of the home + cost to buy + improvements.

If you want you can split out the ADU as a separate basis and enter it as such on the Sch E.  Then the portion of your home you rent  would be a separate Sch E entry.

The common expenses need to be prorated in a reasonable fashion ... by square footage or by occupancy (which is useful for utilities).

For the first year I HIGHLY recommend you seek professional assistance to get this set up correctly due to the mixed use divisions.  And/or  do some reading :  https://www.irs.gov/forms-pubs/about-publication-527

Lastly depreciation is required ... it is NOT optional.  

[Carl]

Roughly, your cost basis is what you paid for the property, plus the cost of any property improvements. Period. (I'm not mentioning the finer details such as your sales expenses incurred at the time of purchase, etc.)

For the purposes of depreciation, you will depreciate based on either the cost basis, or the FMV at the time the property is placed in service..... whichever is *lower*.  Most likely, the FMV is higher now. So FMV value would not be used for depreciation.

Plan to rent both the ADU and a part of the addition.

I take "part of the addition" to be referring to a part of the main property.

I would suggest you treat the ADU as a physically separate rental property from the main structure and enter it as such on the SCH E. Then assuming the main structure is your primary residence and will remain as such, treat that one as renting a part of your primary residence.  This will most likely give you the greatest ease of flexibility in the future if (and when) things change years down the road.

How you treat the cost of utilities can vary, and can depend on how the utilities for the main house and the ADU are metered and billed.

[buch111111]

One way I look at this is as follows:

What is the value of the house per square foot (not including land)? Or what would it cost to rebuild all new? This can be used for a basis for a new purchase. You could then use a reasonable sq ft number for the basis. Land cannot be included. Another item overlooked is the outside or, Hardscape and Landscape improvements. Those are also depreciable and could be included in the basis.

The ADU basis is simply the costs, including all fees, plans, permits and construction costs.

Hope this helps!

[Carl]

Hardscape and Landscape improvements. Those are also depreciable and could be included in the basis.

That's a bit vague. While landscape improvements do add to the cost basis of a property, not all landscape improvements are depreciable. For example, say you purchase a vacant wooded lot next to your rental property so as to provide the tenants a bigger yard.  It adds to the over all basis of the property, but it's not depreciated. Then a year later to pay someone to clear the land so tenants can actually use it. The cost of clearing adds to the cost basis, but that cost is not depreciated.