I have a question regarding my three-family house. I currently reside in one of the units, and the other two units were rented out for 10 months of the year. In addition to this, I have a house meter that measures the utility usage for the hallways.
Recently, I conducted repairs in both of the rented units, and I'm uncertain about the best approach for reporting these repairs. Should I enter the taxes individually for each unit, taking into account their rental status? how should I accurately handle depreciation when using TurboTax?
Any insights or advice on this matter would be highly appreciated. Thank you in advance!"
The first and foremost thing you need to worry about when it comes to depreciation is separating original land cost value from building value. This needs to be done because IRS rules state that land cannot be depreciated - only the building portion can. Generally, you can find the land cost on the buyer's statement when you purchased the property or by looking at county assessment for land and building value to help guide you.
If you are unable to find original land value paid on buyer's statement from when you purchased the property, then your best bet is to use the county assessment for land/building and determine the ratio. Take that same ratio and apply it to the overall cost that you originally paid for the property. For example, if you paid $100,000 for the property and land ratio is 40% then your land value would be 40,000.
Second step, you need to determine if you are missing depreciation from years past. If you are, then you would need to fill out form 3115 in Turbotax, change in accounting method to claim depreciation missed in previous years. Alternatively, you can amend the previous years. Here's a great article to get this done:
Finally, once you have gotten passed all those hurdles, you will have to allocate the depreciable value(building value only - no land) based on two-thirds of the 3 family property. For example, if the depreciable value(no land) is $60,000, then two-thirds would be $40,000 to be split between the two rental units perhaps half and half (depending on square footage and days rented - don't worry, Turbotax will help you with that part). Since the remaining $20,000 for your unit is personal use, it doesn't get depreciated. Personal assets generally are not depreciable.
Now, for your final question on the repairs. When it comes to repairs you have to watch out for two pitfalls. The first one is that you have to make sure that it's actually a repair and not an improvement. As a general rule of thumb, a repair is just to restore the original condition while an improvement increases the value of the property, generally causing the depreciable cost basis to increase. If you find that it's an improvement to the property, then you will have to depreciate it.
If you come to the conclusion that your expenses or part of your expenses are repairs, then the next pitfall you have to watch out for is the date placed in service. Date placed in service is just a fancy way of saying when did you first advertise the rental units on the market so that they are available for rent. If the dates on your repair expense receipts are prior to date placed in service then you cannot deduct them. If they are after the date placed in service or if the rental units were in service the entire year then they are generally deductible.
Now, generally speaking, you should do your best to allocate between the 2 rental units when it comes to income and expenses and make sure you don't deduct anything personal. Remember, personal use cannot be deducted.
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