Basis for an addition to my home

[Jflarabee]

Hello. I built an addition onto my primary residence with its own private entrance. The new apartment has been solely used for short term rentals and has never been owner occupied except for a bedroom that used to be part of the main house but is now used only for the apartment. It was completed and put into service in 2024. When determining the Basis for depreciation, do I use only the building costs of the addition minus the land and put it at 100% business use, or do I include the main part of the house with its original purchase price and 45% business use for the apartment? If I include the main part of the house that I live in, would I add on the cost of improvements we made over the years such as a new roof and new windows for the depreciation basis?

[DianeW777]

It depends. To arrive at the cost basis for the apartment only, you should first use the city or county tax assessment to determine land and building portions.  Next, take the square feet of the apartment and divide it by the total square feet of the home. This will be the business use percentage to use against the total cost of the building 

Add all costs of purchase, original purchase price, improvements that have been done to the entire property before you began to prepare the apartment for rent.  - I would leave the land alone and not enter it for the apartment in the rental asset.

If you have capital improvements that are strictly for the rental apartment you will add that as a separate asset. If it affects the whole house then you will use the formula above to arrive at the apartment percentage.

[Jflarabee]

Thanks for the quick reply! So if I’m understanding this correctly, I will add the original purchase cost of the 864 sq ft home bought in 2014 plus the new garage addition, new roof and new septic from 2018 plus the new windows from 2023 plus the cost to have the new 336 sq ft added on for the apartment along with its new well,  furnace and central air. Then I will say that 40% is used for business (Total house including the apartment is 1200 sq ft. The apartment is 480 sq ft which includes the bedroom that used to be part of the main house). Does that sound correct?

[AmyC]

Yes. Great job!