Renting ADU on primary residence

[Carl]

Regardless of how turbotax does it, I guess for IRS, ADU portion is just another property in Schedule-E isn't it?

It depends on how you enter it. If the ADU is a physically separate structure on the property, I myself prefer to treat it as another physically separate property for tax purposes, and do all the splits between SCH A and SCH E manually myself. When you let the program do the splits, it can't split everything. For example, since property insurance is not deductible for your primary residence (personal use), the program can not always pro-rate it correctly for SCH E.

[u0d4n7a0p]

Hi @Carl ,

Thanks a lot. I do __not__ think you mean that one can treat ADU as separate property and have it so in schedule E __only__ if it is detached ADU.

[Carl]

I do __not__ think you mean that one can treat ADU as separate property and have it so in schedule E __only__ if it is detached ADU.

No, that is not what I mean. Heck, if you're renting a room in your house, then for tax purposes you can just as well manually pro-rate for that too. That means you'll be prorating everything of course, starting from the beginning with the cost basis being pro-rated for the SCH E.

If course, when you do it this way, when you sell your property you "may or may not" be reporting two sales. But it can be done reporting on one sale. The main thing required of course, is depreciation recapture in the tax year of the sale. No big deal really.

[u0d4n7a0p]

Thanks @Carl . I am going to follow 1.163T guidelines for deciding debt allocation for ADU and for debt payment tracing (personal debt is paid off before any debt which earns income).  I am planning to have ADU as a "Separate" address in Schedule - E. I will suffix street number and name with ADU.  Yes this doe mean that I need to keep all the numbers documented every year.