House hacking and depreciation: renting part of your home

When you live in part of a property and rent out the rest, you can depreciate only the rented part. Most owners split the building’s basis by square footage, so a duplex where you live in one of two equal units has half its building basis on the depreciation schedule. A cost segregation study can work on that rental share, and whether it pays depends mostly on its size and whether you can use the losses.

Only the rental portion is depreciable

Your own living space is personal use, and personal-use property isn’t depreciable. The IRS treats a house hack as though you owned two pieces of property, one rented and one personal, and you split costs between them. Expenses that belong only to the rental part, like painting the tenant’s unit, go entirely to the rental. Shared costs, like mortgage interest, property tax, insurance and the roof, get split.

Land comes out first, the same as any rental. See how to set land value.

Allocating by square footage

Square footage is the most common method and the easiest to defend. Measure the space the tenant uses exclusively, divide by the total finished square footage, and apply that percentage to the building basis. Room count is also accepted when rooms are similar in size, but square footage is more precise.

Illustration 1: a duplex. You buy a duplex for $600,000 and live in one unit. Each unit is 1,100 square feet. The county assessor ratio puts land at 20%, or $120,000, leaving $480,000 of building. The rental unit is 1,100 ÷ 2,200 = 50% of the building, so its depreciable basis is $240,000.

A full year of depreciation is $240,000 ÷ 27.5 = $8,727. If the unit is first ready to rent in April, the mid-month convention gives 8.5 months in year one: $240,000 × 8.5 ÷ 12 ÷ 27.5 = $6,182.

Illustration 2: a basement suite. Your home cost $450,000, with $90,000 of land and $360,000 of building. The house has 2,400 finished square feet, and the basement suite the tenant uses on their own is 800 square feet. That’s 800 ÷ 2,400 = one third, so the suite’s depreciable basis is $120,000, and a full year of depreciation is $4,364.

Shared areas

A laundry room, hallway or yard that you and the tenant both use usually stays on the personal side. Count it in the total square footage but not in the rental share. If the tenant has exclusive use of a space, such as their own patio or a dedicated parking pad, it belongs to the rental. Pick a method, write it down with a floor plan and the lease, and use it the same way every year.

Basis when you already lived in the home

Many house hacks start after the owner has lived in the property for a while. When you convert all or part of your home to a rental, the depreciable basis of the converted part is the lower of two figures, both excluding land:

1. Your adjusted basis: what you paid plus capital improvements, minus any casualty losses or prior depreciation.
2. The fair market value on the date you converted it.

If you bought for $350,000 and the home is now worth $520,000, you use your adjusted basis, not the higher market value. If values fell after you bought, you use the lower market value. Keep a dated valuation from the conversion date, such as an appraisal or a broker’s opinion, in your records.

§280A: part of your home versus a separate unit

Section 280A limits deductions for a dwelling unit you also use as a home. Which side of it you’re on depends on what you rent.

Renting part of the unit you live in. If you rent a room or two and share a kitchen with your tenant, the rented space is part of the dwelling unit you live in. Section 280A can then limit rental deductions on that space to the rental income, with any excess carried forward. Depreciation is one of the last deductions allowed under that ordering, so it’s often the one that gets deferred.

Renting a separate dwelling unit. A space with its own sleeping area, bathroom, kitchen and entrance is generally its own dwelling unit. The other half of a duplex fits that description, and so does a self-contained basement apartment. That unit gets tested on its own. If you don’t use it yourself for more than 14 days or 10% of the days it’s rented at fair rent, whichever is greater, normal rental rules apply. A relative staying there below market rent counts as your personal use.

Separate unit or not, the losses are still passive by default. For many house hackers the practical route is the $25,000 allowance, which phases out between $100,000 and $150,000 of modified adjusted gross income. Your CPA decides which rules apply to your setup.

ADUs

An accessory dwelling unit, attached or detached, is usually a separate dwelling unit if it has its own kitchen, bathroom and entrance. If you built it, its basis is the construction cost, and it goes in service when it’s ready to rent. If it came with the property, you allocate part of the purchase price to it, usually by square footage. The land under it stays non-depreciable either way.

Does a cost segregation study pay on just the rental part?

A study can cover only the rental portion, using the same split you use for depreciation. The question is whether that portion is big enough. Our planning range for a house hack is roughly 16% to 28% of the rental basis moved to 5- and 15-year property. These are illustrations, assuming 100% bonus depreciation and the April placed-in-service date from above:

Item	Duplex unit	Basement suite
Rental basis	$240,000	$120,000
Share reclassified	25%	20%
Reclassified	$60,000	$24,000
Year-1 depreciation without a study	$6,182	$3,091
Year-1 depreciation with a study	$64,636	$26,473
Extra year-1 deduction	$58,455	$23,382
Federal tax effect at 22%	$12,860	$5,144
Federal tax effect at 24%	$14,029	$5,612

Both fit an Express Study at $895. The duplex unit covers the fee many times over if you can use the loss. The basement suite is closer, and it depends on the passive rules. If your income is under $100,000, the $25,000 allowance may absorb it. If it’s well above $150,000 and you have no other passive income, the loss gets suspended, and the study mostly creates a carryforward. In that spot we’d usually tell you to wait. Is cost segregation worth it? has the full break-even test.

Selling later: §121 and recapture

If you lived in the property as your main home for at least two of the five years before the sale, the §121 exclusion can shelter up to $250,000 of gain, or $500,000 for most married couples filing jointly. Two limits matter for house hackers.

First, depreciation you claimed (or could have claimed) after May 6, 1997 isn’t covered by the exclusion. That part of the gain is taxed at up to 25%, or at ordinary rates for 5-year components from a cost seg study. See depreciation recapture on a rental.

Second, if the rental space was a separate dwelling unit, like the other half of a duplex, you generally split the gain and the exclusion doesn’t cover the rental unit’s share. If you rented a room inside your own unit, there’s generally no split, though the depreciation is still taxed. Different rules apply if the whole property was a rental before you moved in.

What to do next

Measure the rental space and the total, write down the method, and find the land ratio on your county assessment. Then run the rental share through the rental property depreciation calculator. If the numbers look worthwhile and you can use the losses, a free proposal will price a study on just the rented part. The FAQ covers documents and timing.

This is general information, not tax advice. Your CPA should confirm how it applies to you.