A house hack property is a residential property that you live in and also rent out a portion of to other tenants.
This can be a great way to offset the costs of owning a home and potentially even turn a profit.
However, it’s important to understand how to properly depreciate your house hack property for tax purposes.
What is Real Estate Depreciation?
First, it’s important to understand the concept of depreciation.
When you buy a physical asset, such as a house or a car, it is expected to lose value over time due to wear and tear.
This loss in value is known as “depreciation.”
The IRS allows you to write off this depreciation for many things, including real estate.
For residential real estate, the IRS generally allows you to depreciate the value of the building (not including the land) over 27.5 years.
This means that if a rental property building is worth $275,000, you get a $10,000 write off every year for 27.5 years.
Now, if you sell the property and you make more than the depreciated value of the property, you’ll have to pay recapture taxes. That’s because you’ve written off the value of the property already, but now are trying to collect that value back via a sale. The IRS makes you pay taxes on that “recaptured” value.
But, in general, depreciation lets you write off the value of the property over time to save on taxes.
But how does it apply to house hacking?
Can You Depreciate a House Hack?
Yes, you can depreciate a house hack property for tax purposes. The IRS generally allows you to claim depreciation on the business portion of your house hack property, which is the portion that you rent out to tenants.
For example, if you own a duplex and live in one unit while renting out the other, you can claim depreciation on the portion of the property that you rent out.
So, yes, even as a house hacker you can claim depreciation as an expense on your tax return to reduce your taxable income.
How Do You Claim Depreciation on a House Hack?
To claim depreciation on your house hack property, you will need to file Form 4562 with your tax return.
[NOTE: taxes filings can get complicated and tax rules are always subject to change. Be sure to speak with a tax professional to make sure you are doing things properly!]
This form requires you to provide information about the property, including its purchase price, the date it was placed into service as a rental, and its useful life.
As we discussed, for residential rental properties, the useful life is generally 27.5 years.
Remember, you can only claim depreciation on the business portion of the property, not the personal portion. This means that if you own a multi-unit property and live in one unit, you can only claim depreciation on the unit(s) that you rent out.
Finally, it’s important to note that you cannot claim depreciation on the land that your house hack property is built on. This is because land is considered to have an indefinite useful life and cannot be depreciated.
Conclusion: Depreciating a House Hack
In summary, claiming depreciation on your house hack property can be a great way to reduce your taxable income and potentially save money on your taxes.
You can potentially depreciate other portions of the property as well. If you have a home office or other business space in your house hack property, you can claim depreciation on that portion of the property as well (although a home office would be depreciated over 39 years, not 27.5 years).
However, it’s important to understand the rules and guidelines set by the IRS and to accurately calculate the business portion of your property.
As mentioned above, speak with a tax professional to make sure you’re using all available tax benefits and you are claiming them properly.
By properly depreciating your house hack property, you can minimize your tax bill and make the most of your investment.
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