We built an ADU above our attached garage with the sole purpose of renting it. Do we do an Adj. Cost Basis for the whole house or is the Basis separate from the house?

[dube744r]

Hired an architect in Aug 2016 with the intent to build an ADU above our garage and rent it for additional income.   Our first tenant moved in on 3/8/2018 after Final Inspection.  Can we deduct construction costs? Do we treat the ADU as a separate entity from the house or is it seen as an improvement to the house?

[MichaelDC · Accepted solution]

Yes. It's easier to consider the ADU like separate structure and depreciate it over 27.5 years. Any work you do to get the property ready for renting is classed by IRD as capital improvement including architect design fees, and is not fully deductible. Depreciate the total cost of the improvement from the date placed in service (ready to rent).

Furniture and appliances used in rental property will be 5 years depreciation. Hopefully, you have a separate meter for electricity and utilities. Otherwise, you can use any reasonable means of allocating those expenses.

Please feel free to post any additional details or questions in the comment section.

[khanh637]

Hi,

My case is similar to the original post. 

However, I want to ask in further details as to how to account for the costs in building this new unit (mine is detached). You mentioned engineering/architect fees can be added to the construction costs for depreciation over 27.5 years; what about other city costs such as plan check fees, school board fees, permit fees, and other inspection fees related to this additional unit? Can these all be added to the total cost of the unit to be depreciated? Additionally, from start of the home design with the architect to final inspection was almost 2 years. So how should I report this capital improvement project on my 2018 and 2019 tax returns?

thanks,

K

[Critter]

ALL costs to complete the project  are totaled and will  comprise the cost basis of the asset which starts being depreciated when placed in service ... just because it took more than one tax year doesn't change that fact that nothing is taken until  it has a business use.

Read up on this in the IRS Pub 527, pub 551 & pub 946.

https://www.irs.gov/pub/irs-pdf/p527.pdf

https://www.irs.gov/pub/irs-pdf/p551.pdf

https://www.irs.gov/pub/irs-pdf/p946.pdf

[khanh637]

Thank you!