Depreciation on a mixed property

[Lolajean123]

I have a client that owns a duplex where she rents half of it out to tenants and her sole proprietorship uses the other half. For depreciation, I believe the building should be depreciated over 39 years (as a commercial property) since it does not pass the 80% rule (80% is not used for residential). Is this correct thinking?

Also, would the depreciation be reported on sch c then?

[TaxMonkey]

Normally a duplex would be considered two separate dwelling units. IRC 168(e)(2) doesn't contain a very specific definition, but does include the word "apartment" from which I conclude that a single building can contain more than one dwelling unit.

(I) the term “dwelling unit” means a house or apartment used to provide living accommodations in a building or structure, but does not include a unit in a hotel, motel, or other establishment more than one-half of the units in which are used on a transient basis, and

https://www.law.cornell.edu/uscode/text/26/168#e_2

The term dwelling unit is also referenced in IRC 280A and the regs provide a much more comprehensive definition, although not specifically referenced by IRC 168.

Therefore, I would treat your situation as one dwelling unit would be a long term residential rental with a 27.5 year class life and the other would be commercial or business property with 39 year class life.

[Lolajean123]

Would I split the amount of the building 50/50 then? So if the building cost 220k then 110k to depreciate for 27.5 years on sch e and the other 110k to depreciate on sch c for 39 years?

[TaxMonkey]

Assuming that both dwelling units are equal (same size, etc) that is what you would do.

[TaxGuyBill · Accepted solution]

This is one of the unusual time I disagree with TaxMonkey.  The entire building should be 39 years.

§168(e)(2)(A)(i) states the determination is based on if the "building or structure" has rental from dwelling units.  If I'm reading your post correctly, the rental income/value from the "building or structure" is 50% from dwelling units, so it does not qualify as Residential Rental Property.

[Terry53029]

I would agree with @TaxGuyBill.  Depreciation for a rental vs. non rental activity is based on specific rules. That is determined at the BUILDING level. There's an 80% of income rule, so even though you have both short and long term  activities  the entire building may be depreciated at either 39 or 27.5 years, depending on analysis. 

[TaxMonkey]

After further consideration, I agree with you.  All of the dwelling units in the building should be depreciated using the same class life.

Here is an article with a similar example and the same conclusion.

https://bradfordtaxinstitute.com/Content/Depreciating-Residential-Rental-and-Commercial-Real-Propert...