New Home Purchased and Shared With Renter

[ggamm]

Hello - I recently purchased my first home and want to make sure I can project my overall tax burden ahead of time. I plan to do itemized deductions this year since it will be higher than the standard deductions. Things in particular that I know can impact my tax burden/deductions that I can use some help understanding in advance of next year's tax season include:

• Energy Efficient Renovations - I believe there are tax credits or deductions for making energy efficient renovations, what do I need to hold onto/document for tax season and what are the available deductions?
• Additional Renter - I am moving into the house as my primary residence, but will be renting out the second bedroom. I've read conflicting reports about what expenses I can deduct for a home being partially rented and can use guidance. For context, I am doing major renovations throughout the home (including floors, windows, A/C, etc.) in the common areas and in the renter guest bedroom.
• General Renovations/Repairs - I'm also not certain how to best factor in deductions vs. capitalization for the updates I'm making to the home and how that impacts this year's tax burden as well as future capital gains taxes when I eventually sell my home. Some renovations are cosmetic, but many (broken windows, replacing floors with cracks/issues) fall more into the repair category.

I appreciate your help!

[PoojaT27 · Accepted solution]

Hello,

Thank you for participating. These are some very good questions that I would love to answer to the best of my ability.

1. 

Equipment and materials can qualify for the Nonbusiness Energy Property Credit only if they meet the standards set by the Department of Energy. The manufacturer can tell you whether a particular item meets those standards.

For this credit, the IRS distinguishes between two kinds of upgrades.

The first is "qualified energy efficiency improvements," and it includes:

• Home insulation
• Exterior doors
• Exterior windows and skylights
• Certain roofing materials

The second category is "residential energy property costs." It includes:

• Electric heat pumps
• Electric heat pump water heaters
• Central air conditioning systems
• Natural gas, propane or oil water heaters
• Stoves that use biomass fuel
• Natural gas, propane or oil furnaces
• Natural gas, propane or oil hot water boilers
• Advanced circulating fans for natural gas, propane or oil furnaces

  Energy Tax Credit: Which Home Improvements Qualify? 

2. Any renovations that you do like floors and windows before renting increase the cost basis of your property and hence increases the depreciation that you can take when you start renting. For expenses after you are ready to rent, you are  allowed to deduct any reasonable expenses used in the conduct, maintenance and managing of her rental properties. That includes:

• Utilities
• Taxes
• Necessary and reasonable repairs to the property
• Travel costs incurred while doing business

Rental Property Deductions You Can Take at Tax Time 

3. Any major repairs that you make to the house that increase its value, increase the adjusted cost basis of the house. What that means when you sell the property is lower capital gains since the adjusted cost is higher. 

Home Improvements and Your Taxes 

[Amorette_M]

Congratulations on your new home! And kudos to you for tackling these items in advance!

Energy Efficient Renovations - There are two credits that you should check out: Nonbusiness Energy Property Credit and Residential Energy Efficient Property Credit.  You should keep all your records of material and labor costs.  Review the differences between the credits (on the previous link) to determine what your credit limits are, based on the type of eligible property.  Some credits will apply to a second home as well.  

Additional Renter - There is a lot of discussion around this topic because the IRS has some rather specific regulations for this income.  Here are important factors to consider with this rental.  Are you planning on having a roommate or operating like an AirBnb?  Review this link if you are considering the AirBnb route.  When a portion of your property is rented out and a portion is used for your personal purposes, the IRS is very detailed on what they will and won't allow under these circumstances.  You will need to allocate your expenses between personal and rental usage.  You can do this by either dividing the expense by the number of people living in the home or based on square footage of use.  Keep detailed records of your expenses. You can get the full picture of rental income responsibilities by clicking here.  

General Renovations/Repair - In order to get an idea of your options for depreciating your assets, dive into this article where it explains in detail.  Depreciating assets can get tricky but is explained well here.  Capital gains will depend on amount of gain and length of ownership.  Consider more of the details here.  This article will help you distinguish between a repair or an improvement.  Taking all of your factors into consideration after reviewing these resources will help you best determine the type of rental that will be the best tax benefit for you. Good luck!