Comments on: The owner-occupied duplex tax shelter

By: Alan

Alan — Thu, 14 Apr 2011 17:10:50 +0000

@Summer
As far as allocating expenses on Schedule E and depreciation, I use Pub 527, p16 as my reference on “how to divide expenses”. It says “use any reasonable method for dividing the expense”, and I am quite lenient in what I consider reasonable.
My duplex has 3 livable floors. I live on 2 as a single person and rent the 1 floor out to a couple. I could base it on livable space and only deduct 1/3 but that’s not fair to me since there are two of them using twice as much water and other services. So I just split it down the middle and deduct 1/2. If I had 3 units and I lived in 1, I would deduct 2/3rds. I suppose the IRS could disagree with this leniency if I ever got audited, but it’s certainly up to debate, and I’d rather err in my favor than theirs in this case.
So to answer your question on the bills, I would deduct 2/3rds as rental expenses based on you having 2 out of 3 units as rentals. The square footage on all 3 is about the same anyway. However, if you are the only one using the garage and do work on it, then that would be personal. To get around that though just simply let them store stuff in it. Then it’s being used by everyone and deductible.

By: cornelia

cornelia — Thu, 14 Apr 2011 00:38:07 +0000

Does anyone know about whether it’s kosher to take the home office deduction for owner-occuiped duplexes/triplexes?

By: Luba

Luba — Fri, 08 Apr 2011 21:22:51 +0000

After treating rental unit separately – you’d be normally left with 1/2 of interest and 1/2 of property taxes to deduct on Sch A.

If you file electronically – doesn’t IRS match 1099-INT amounts to those reported by lenders? If you show just 1/2 of interest – wouldn’t it trigger a mismatch and ELECTRONIC filing being REJECTED by IRS?

Has anybody actually tried to file something like that ELECTRONICALLY? Was it accepted? Thanks!

By: Summer

Summer — Fri, 01 Apr 2011 05:27:51 +0000

I can’t even tell you how cool it was to find this site after being buried in IRS forms and documents!

I’m attempting to do my own taxes after buying a triplex of which I live in part of. The triplex consists of a duplex in front (each unit being 620 sq. ft.) and a mini house in the back (580 sq. ft. plus an attached garage that can fit 1 and 1/2 cars). There was one month that we collected rent from tenants in the back before they moved out. They were using the garage during that month. There are a few bills (i.e. getting the whole place termited) that we can deduct from all three units. I’m aware that I can only deduct one month’s worth of it from the back house as a rental expense. My question is, in trying to divide up the bill into 3, do I count the garage in my percentage calculations or do I just count the livable space? Any help is much appreciated!

By: Peter Schafer

Peter Schafer — Sat, 12 Feb 2011 00:35:04 +0000

Thanks for that information. One more, are you using the original purchase price for the cost basis plus certain settlement costs, or Fair market value or assessed value. If one of the last two how are you figuring that out? Are you taking off for the land under the house?

By: landlady

landlady — Fri, 11 Feb 2011 21:02:11 +0000

Hi Peter. Yes, unless the property is somehow unevenly split, in which case you might be depreciating 2/3, 3/4, 1/4 etc. depending on how much space the rental unit takes up compared to the portion that is your residence.

By: Peter Schafer

Peter Schafer — Fri, 11 Feb 2011 20:53:18 +0000

Finally the information I was looking for. Just to clarify, is it my understanding that for a owner occupied, I just split the cost basis down the middle and depreciate that as normal (27.5 yrs) for my rental unit?

By: Jen Butel

Jen Butel — Tue, 01 Feb 2011 03:31:40 +0000

Really great tax info for duplex owners. Thanks!

By: Mary

Mary — Tue, 23 Nov 2010 21:54:25 +0000

Great! I both a duplex 4 months ago and really had a lot of questions in re-taxing, so i am really glad that I got this property!!Thank you!I need more articles like this, Please!:)

By: Peter

Peter — Mon, 15 Feb 2010 14:44:15 +0000

Thanks for a great post. The discussion of owner-occupied multifamily tax strategy is hard to come by. I have tried to develop my own plan by scouring the IRS website (extremely time-consuming). I think that two issues should probably be clarified here:

(1) “And yes, you do want to be able to show a loss — this offsets your income for the year.”

On the Schedule E, the losses sustained from depreciation, mortgage interest, and other rental costs outlined in the post offset RENTAL income. Unlike the mortgage tax deduction that you get for your personal unit, this does not directly offset annual income generated outside of the property itself (from your job). If you treat them in the same way, you are certainly “doing it wrong.”

With that said, if your annual rental income turns out to be a loss, then this can offset other income just like any other investment loss. However, there is an annual cap on these losses. If, for example, you have a very expensive year due to major repairs or other costs, I believe that losses above that cap can roll over to offset the next year’s income. So keep track of them.

(2) “I’m not selling my duplex any time soon, but yes, it is my understanding that if you live in a duplex before selling, you get the same tax benefit on the profits that you would if it was a single-family home.”

From what I have read, you will be entitled to the capital gains exemption ($250,000 if single or filing separately, $500,000 if married) for your PERSONAL unit. That is, the unit that you have resided in for at least 2 of that past 5 years. Capital gains associated with the other unit will be fully taxed. So any appreciation in the value of your rental unit (50% of total gains) will be taxed upon resale, minus the cost of capital improvements that you make (ie new roof, new windows, new kitchen, etc). So KEEP TRACK of the cost of capital improvements made to the rental unit (or 1/2 of the improvements made to the entire property).

I have a call into the IRS to make positively sure that this is the case — I am currently about 85% sure.