Duplex Rental Question

[Terry D EA]

Client bought four duplexes that are the same size and located on separate lots beside each other. Client paid one price for all four buildings and land. My first thought is each duplex is a separate rental enterprise with it's own income and expenses. Because these are all the same size and the county has the land listed at the same value, would you divide the total by four to arrive at the depreciable basis?? Personally I think this is best if the client ever decides to see just one unit/duplex. Opinions please.

[Lee B]

First, I would allocate the total price between Land and Bldgs.

Then I would divide the the Land total by 4 and the Bldg total by 4.

[Terry D EA]

Thanks my thoughts exactly. Just needed another opinion.

[Max W]

Sure.  If they are are 4 separate properties, they should each be depreciated separately.  The property lines might just as well be 8 lane highways between them.

[grandmabee]

I would separate it into 2 rentals, not four because you can't sell just one half of a duplex.  If you are living in one part of the duplex then I would separate that one out.  But if all four are rented do just 2.  also allocate land and buildings.

[Lion EA]

Wait a minute. You said four duplexes. Each duplex is two residences. So, eight rental units, right?

[Yardley CPA]

13 hours ago, grandmabee said:

I would separate it into 2 rentals, not four because you can't sell just one half of a duplex.  If you are living in one part of the duplex then I would separate that one out.  But if all four are rented do just 2.  also allocate land and buildings.

Why can't you sell 1/2 of a duplex.  Isn't a duplex one structure with two separate and distinct homes?  

[grandmabee]

a duplex has a joint wall on the same tax lot.  In my area we can't split for a sale.  Maybe it depends on counties and states. Yes it is two separate home but still joined.

[grandmabee]

Oops I guess I read wrong,  I was answering as 2 duplex not 4.  So yes I would split into 4.

[Lion EA]

What happens when one unit is not available for rent while you repair the other after an abusive tenant? Do you have to take both sides out of depreciation? Why not treat all eight units as separate columns on Sch E with their own income, expenses, and depreciation?

If you do sell a duplex down the road, you'd combine the two rental units in that duplex to arrive at your cost basis and allowed or allowable depreciation.

[Abby Normal]

2 hours ago, Lion EA said:

What happens when one unit is not available for rent while you repair the other after an abusive tenant? Do you have to take both sides out of depreciation? Why not treat all eight units as separate columns on Sch E with their own income, expenses, and depreciation?

If you do sell a duplex down the road, you'd combine the two rental units in that duplex to arrive at your cost basis and allowed or allowable depreciation.

You don't have to take rentals off of depreciation for extended repairs. They are still 'in service' as a rental.

[Lion EA]

Even when not available for rent?

[Abby Normal]

Idle Property

Continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle (not in use). For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it isn’t available for rent.

Of course, the follow up question is, how long is temporary. And I doubt the code spells it out, and makes it a 'facts & circumstances' situation (i.e., gray area).

(You'll have to scroll up a bit, when you click that line. Those IRS links always seem to be off by a bit.)

[Terry D EA]

I think the available for rent to begin depreciation is at the time of when the property is first placed in service.  Example; property was purchased in August, and repairs were necessary before the property is rented and it takes till November to complete. Depreciation begins in November. During idle time, depreciation and expenses like utilities and property tax are still claimed. 

[Lion EA]

You can tell I currently don't have any clients with rentals!

[jklcpa]

"Placed in service" means available for rent which includes the period it is advertised for rent but before actually collecting rental income.

[Roberts]

Had a client a few years ago who bought a unit via a tax lien sale, spent about $75k fixing it up for 9 months and then wanted to expense the fix up. When I wouldn't do it he wanted to depreciate it the entire time he was working on it. I told him he was a rehabber while fixing it up, he was a landlord the day he got a residency permit. He fired me soon after.

He had this idea that he'd never pay any federal or state income tax and do one of these every year and the tax savings would allow him to buy a new rental every year.

 

On a side note a friend is posting non-stop politics on Facebook and has this odd idea that they pay over 30% of their income to federal taxes. In reality they pay about 8%.

[Lion EA]

People look at their pay stubs with FIT, SIT, FICA, MED, 401(k), health insurance, and on and on, and don't count their refunds and think they pay too much income tax. 

[Max W]

On 2/24/2020 at 5:11 AM, Yardley CPA said:

Why can't you sell 1/2 of a duplex.  Isn't a duplex one structure with two separate and distinct homes?  

You could if you are allowed to split the lot.  Otherwise, you would be a co-owner of the entire duplex, much the same as condos owners are co-owners of the community.