Asssts & Depreciation

[Ognak1]

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?

[#2]

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]

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).

[Carl]

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

Technically, speaking, neither. It's considered a property improvement. If you rented it out in 2020, then it's classified (not "considered") as Residential Rental Real estate and depreciated over the next 27.5 years.

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

What it cost you from the time you decided "I want to build an ADU" until the date the date the property was move-in ready, is your cost-basis. The total of "EVERYTHING" from design, permitting, clearing the land, pouring the concrete, buying/installing the appliances, the labor you paid, to the cost of the last roofing nail holding down the last shingle. So if materials cost you $10,000 and you paid someone $50,000 to build it, your cost basis in the structure is $60,000.

That's your cost in the structure "ONLY". So if you're renting it out you'll have to allocate some land for the renter to use also. That is, unless they're expected to enter/exit the property without stepping one toe on your property. 🙂

[Carl]

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

Technically, speaking, neither. It's considered a property improvement. If you rented it out in 2020, then it's classified (not "considered") as Residential Rental Real estate and depreciated over the next 27.5 years.

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

What it cost you from the time you decided "I want to build an ADU" until the date the date the property was move-in ready, is your cost-basis. The total of "EVERYTHING" from design, permitting, clearing the land, pouring the concrete, buying/installing the appliances, the labor you paid, to the cost of the last roofing nail holding down the last shingle. So if materials cost you $10,000 and you paid someone $50,000 to build it, your cost basis in the structure is $60,000.

That's your cost in the structure "ONLY". So if you're renting it out you'll have to allocate some land for the renter to use also. That is, unless they're expected to enter/exit the property without stepping one toe on your property. 🙂

[Ognak1]

Thank you for your informative reply.

Based on what you said earlier....

If I spent the entire 2020 having the ADU built ( we will be technically finished tomorrow), how would I categorize this asset? The choices are RESIDENTIAL RENTAL REAL ESTATE (it wasn't rented at all),  APPLIANCES CARPET FURNITURE, or LAND IMPROVEMENTS?

[Carl]

While you can separate out some things like the appliances and the such, doing so on new construction really provides no benefit tax-wise. Remember, depreciation is *NOT* a permanent deduction. You are required to recapture that depreciation *AND* pay taxes on it, in the tax year you sell or otherwise dispose of the property. That recaptured depreciation increases your AGI and has the potential to put you in a higher tax bracket.

That's why I try my best to keep the depreciation I"m required to take by law, as low as a legally can. What "may" help me now, has great potential of biting me hard on the tax front, in the future.

Here's some comments I've heard on this.

 - But my recaptured depreciation is capped to be taxed at a maximum tax rate of 25%?

True. But none of your other income has such a cap on it.

- But I will never be selling this house for as long as I'm alive?

Okay. So are you also saying that there's absolutely no chance the house could burn to the ground? Or that a tenant will never have cause to sue you for everything you own? Or any number of other things that could happen in your life not related to the rental property that could "force" you tell sell?