Depreciation Calcs - Where to record improvements for new ADU construction

[CandP507]

Hello,

In 2020, we built an accessory dwelling unit (ADU) on the same parcel that also has our primary residence.  We were an owner-builder for the ADU.  The ADU is a separate structure from our primary residence.  The ADU also has a separate address from the primary residence; however, it’s on the same parcel.  We listed the ADU for rent on May 1, 2020.  The ADU was rented on June 1, 2020.  The ADU has only been used for rental income (no personal use).  We are trying to enter the ADU into turbo tax for depreciation purposes.  We entered in the expenses; however, we cannot find where the enter the improvements for the depreciation calculation.

Our current approach is as follows: We added a Rental Property (Sch E) under the wages & income section. We entered in the expenses related to the ADU; however, we cannot find where the enter the improvements (for the depreciation calculation).

When attempting to fill out more information, for the question, “Was this property your residence in the past,” we selected “no.” For the question “Did you purchase this property?”, we tried “No, I acquired it in a different way” and “Yes” but was unable to get to a section to allow entry of construction cost (improvements).

Additional information:

• We receive one tax bill for both structures that are located on the same parcel.
• We paid for the ADU in cash, there is a mortgage for the original purchase of the parcel.
• All utilities are metered separately with the exception of water.
• The ADU makes up 30% of the combined square footage.

Any guidance would be much appreciated.

Thank you!

C and P

[AmeliesUncle]

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@CandP507 wrote:

We entered in the expenses related to the ADU; however, we cannot find where the enter the improvements (for the depreciation calculation).

“Did you purchase this property?”, we tried “No, I acquired it in a different way” and “Yes” but was unable to get to a section to allow entry of construction cost (improvements).

Additional information:

• We receive one tax bill for both structures that are located on the same parcel.
• We paid for the ADU in cash, there is a mortgage for the original purchase of the parcel.
• All utilities are metered separately with the exception of water.
• The ADU makes up 30% of the combined square footage.

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Under the rental section, there is a place to enter "Assets" for depreciation.  That is where you enter the cost to build it.

I would say you "purchased" it.  Building it is pretty much purchasing it.

Except for figuring out how much property tax to allocate towards the rental, there shouldn't be a need to look at the tax bill.  Just enter the actual cost you paid to build it, and leave the land as $0.

Be sure you do not enter any mortgage interest as an expense for the rental.

The 30% of total square footage should not matter (except for trying to figure out how much property tax to allocate for the rental).  You are ONLY enter expenses for the rental, so nothing from your personal home should be factored into what you enter.

[CandP507]

@AmeliesUncle 

Thank you for your response!

Ok, so if I select “Yes” for “Did you purchase this property”, I end up on the following screen requesting the following information:

• Purchase Date (This be the date paying off the ADU construction, correct? Or would this be the date that we originally purchased the parcel that at the time only had our primary residence on it?)
• Available Date (This would be the date that we listed it on Craigslist as being available for rent, correct?)
• Original Purchase Price (This would be the price of the ADU construction, correct?)

Here is the part that throws off my total amount to be depreciated over 27.5 years. Under the improvements section, it asks for home improvements such as (replacing the roof, painting, refurnishing, etc) and room additions (building additional bedrooms or bathrooms). I originally inputted values here based on the ADU original construction cost thinking that building a roof was the same as replacing a roof, but now I’m thinking I should leave these values as zero since it is not an improvement occurring after the completion of the ADU construction?

Thanks for your help!

[AmeliesUncle · Accepted solution]

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@CandP507 wrote:

• Purchase Date (This be the date paying off the ADU construction, correct? Or would this be the date that we originally purchased the parcel that at the time only had our primary residence on it?)
• Available Date (This would be the date that we listed it on Craigslist as being available for rent, correct?)
• Original Purchase Price (This would be the price of the ADU construction, correct?)

Here is the part that throws off my total amount to be depreciated over 27.5 years. Under the improvements section, it asks for home improvements such as (replacing the roof, painting, refurnishing, etc) and room additions (building additional bedrooms or bathrooms). I originally inputted values here based on the ADU original construction cost thinking that building a roof was the same as replacing a roof, but now I’m thinking I should leave these values as zero since it is not an improvement occurring after the completion of the ADU construction?

---

I would enter the date the ADU was finished (livable).

Yes.

Yes.

If you already entered the full cost of the ADU, you are correct that "improvements" are only things that happen AFTER it was "placed in service".  However, if you are depreciating other things (carpet or appliances), you can depreciate them separately (over 5 years, rather than 27.5 years).

[K-L]

@AmeliesUncle Do you mind if I ask an add-on question?

Our situation is nearly identical to @CandP507's, the only difference is that we opened a HELOC on the existing home to pay for part of the ADU's (rental) construction costs. All funds from the HELOC went to the ADU construction, we didn't use it on anything else.

We received 2 1098s from our bank, one for the old mortgage and one for the HELOC.

Should we enter the Interest paid on the HELOC (as seen on the 2nd 1098) as an expense for the ADU (rental)?

Thank you!

[AmeliesUncle]

Yes, any loan interest for money that was used for rental purposes is a deduction for the rental.

[MarthaNell]

I have a similar question.  We are building a cabin for vacation rental purposes.  We began construction in 2021 and it will be finished in 2022.  We are paying as we go - no loan.

How do I treat the amount we spent in 2021 towards the cabin (logs, excavating, foundation)?  Do I wait until 2022 and show it only as putting a new building in service?  How do I treat the investment, since there is no loan and we are incurring costs to build it?

Any guidance is appreciated!

MNJ

[LeonardS]

Yes, you will wait until the rental cabin is completed, 2022, and ready to rent to report your expenses.

When your cabin is ready to be used as a vacation rental in 2022 you will start depreciating the cabin. 

You will use the cabins basic as the starting point for depreciation

Your cabin's basis for depreciation is the cost of materials, and labor you paid for.  Plus other required legal costs such as permits, inspections, and surveys.   You can not include any value for your time spent constructing the cabin

[MarthaNell]

Thank you, this is very helpful.

MNJ

[user06shrav]

I am in similar situation. I convert my garage into an ADU. I started construction from Jan -June 2022. I started renting from Aug 2022. When i tried to enter construction cost, it is asking date purchased or acquired. will it be Jan 2022 when i started construction or will it be when I started renting or will it be since when I bought the house?

Once i entered construction cost, it is taking me to special depreciation allowance section rather than 27.5yrs regular depreciation, what should I do?

Thank you for your help

[PatriciaV]

The acquisition date for new construction is the date on the Certificate of Occupancy (if any) or the date it was available to be rented (for a rental property).  Be sure you enter the ADU as a rental property and the construction costs as a rental real estate asset. This will result in the allowable depreciation period of 27.5 years.

@user06shrav 

[user06shrav]

Thank you Patricia for the explanation. Another question I have is related to option Turbo asked is expense deduction.

1) Turbo automatically calculate based on the % of square footage

2) I will add expense one by one

Which option is better?

[DianeW777]

In my opinion adding them one by one is best. Entering the expenses one by one using the business use percentage where necessary provides the desired result.  It's difficult if  you have expenses that are fully rental and others that must be prorated based on the business use.  

@user06shrav