Asset & Depreciation

[Ognak1]

Hello

We have a rental property. We built a second rental, called an ADU (Additional Dwelling Unit) from the ground up in the backyard.

With this ADU, can the expenses to build it be be depreciated?

Thanks!

[ToddL99]

Yes, the expenses to construct the additional dwelling unit (ADU) can be depreciated.

Add the ADU as a new rental property asset in the Assets/Depreciation interview of Rental Properties and Royalties. Don't show any value for the land, since it was already accounted for (excluded) when you entered the cost basis for the principal rental unit.

[Ognak1]

Thank you for your quick reply.

1. Is building  an ADU considered a Land Improvement, or Residential Rental Real Estate?

2. All of the different disciplines that it took to build the Unit, would each part be depreciated separately, or together?

[ToddL99 · Accepted solution]

An ADU (Additional Dwelling Unit) is a "Land Improvement".

If you place it in service as a rental unit, then it is also  "Residential Rental Real Estate".

If placed into rental service, the total cost of the ADU is depreciated as a single asset - residential real property. 

(The cost of materials and labor (plumbing, carpentry, electrical, etc.) are not entered separately).

[nevasha]

1) what if the cost of construction are incurred incurred 2 tax years?

2) what is the period of depreciation?  Surely I  can’t  depreciate the entire cost in the year it’s finished and ready to rent?

[PatriciaV]

@nevasha

Expenditures for construction in progress is considered a non-depreciable asset (typically recorded as "Work-In-Progress" on the balance sheet). This treatment is especially appropriate for expenditures that continue from one tax year to another.

Once the actual asset is placed in service, the total expenditures are recorded as a single asset for depreciation. (In accounting terms the WIP total is reclassed to an asset account.)