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Context: I'm still doing 2011 and 2012 taxes.

I purchased a house in the beginning of 2011 that is 3 units all of which needed some level of renovation. For the first year, 2011, I lived in the whole thing myself using each of the units for their bathroom or extra bedrooms for guests. No units were ever put up for rent.

For the second year one unit was rented the second half half the year (2012). I lived primarily in one of the units, and the third was not rented, and casually used by me when my bathroom was under construction.

The questions:

  • Should I count the whole thing as my primary residence for the first year? Corollary is that if so I would deduct all of the interest and related mortgage deductions.

  • For the second year (2012), should I split it into 2 or 3? and start depreciation on the ones that aren't my residence?

    • If split in 2, only depreciate the one that is rented?
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First of, as I said in the other answer, you're in a tricky situation already being non-compliant. This question adds complexity over that. I strongly suggest getting a professional (EA/CPA licensed in your State) help you with this. Don't do it on your own, especially if you're deducting bunch of stuff that may not be allowed in the end. I'm not a tax adviser or a licensed tax professional.


That said, here's what I think:

Should I count the whole thing as my primary residence for the first year? Corollary is that if so I would deduct all of the interest and related mortgage deductions.

Well, I personally would suggest not doing so. You can only have one primary residence, and you're talking about three different residences. You can instead either capitalize the interest on the future rental units or deduct it as investment interest if you have investment income to deduct it from. That's my take, which I think is safe.

If you find a professional (licensed EA/CPA) who would be able to legally justify that multi-unit home can be a primary residence as a whole (using precedences/regulations/prior Tax Court decisions) - then go ahead and do that. Have the professional prepare and sign off the return, though, and of course - don't lie or withhold information from your professional tax adviser.

For the second year (2012), should I split it into 2 or 3? and start depreciation on the ones that aren't my residence?

You can only depreciate assets put in service. I.e.: your depreciation starts when the units are first available for rent. You cannot depreciate units during the rehab/renovation or while you're still using them for yourself. Only once you put up that "FOR RENT" sign, you can start taking the depreciation.

So the facts of your case are that you can take the depreciation on 1 unit for 1/2 year. The unit you live in cannot be depreciated as it is your primary residence, the vacant unit cannot be depreciated as it was not put in service - is not available for rent, you use it for your personal use.

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Had an accountant solve this and:

  • For 2011 they counted the whole thing as my primary residence.
  • For 2012 they counted any portion that was not for rent as my primary residence for the period it was not for rent.

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