Primary Residence with rental ADU Tax Questions

[Bodhi 1127]

I have been searching for a home in Colorado which will act as my primary residence but have an additional ADU I rent out.  The tax considerations are still confusing me.  I will meet with a local CPA but thought I would check here too for any general guidance.

• Will the rental income tax % I pay be in line with my federal income tax rate?  For example, if my federal tax rate is 32% will the income I earn on this ADU also be charged at that 32% level?
• Will I be able to depreciate the portion of the structure I rent?
• Will I be able to deduct mortgage interest and property taxes on the portion of this property I rent?

[Handcruser 2805]

I have been searching for a home in Colorado which will act as my primary residence but have an additional ADU I rent out.  The tax considerations are still confusing me.  I will meet with a local CPA but thought I would check here too for any general guidance.

• Will the rental income tax % I pay be in line with my federal income tax rate?  For example, if my federal tax rate is 32% will the income I earn on this ADU also be charged at that 32% level?
• Will I be able to depreciate the portion of the structure I rent?
• Will I be able to deduct mortgage interest and property taxes on the portion of this property I rent?

If you rent it out and don’t tell anybody about it did it really happen?

[Dbeasy 15264]

28 minutes ago, Bodhi said:

I have been searching for a home in Colorado which will act as my primary residence but have an additional ADU I rent out.  The tax considerations are still confusing me.  I will meet with a local CPA but thought I would check here too for any general guidance.

• Will the rental income tax % I pay be in line with my federal income tax rate?  For example, if my federal tax rate is 32% will the income I earn on this ADU also be charged at that 32% level?
• Will I be able to depreciate the portion of the structure I rent?
• Will I be able to deduct mortgage interest and property taxes on the portion of this property I rent?

The first thing you need to decide is what business the ADU is renting under. You need to either have a sole proprietorship, s Corp, or llc. You need to talk to a lawyer on the best choice. Then, your accountant will help you decide how to file taxes, either on schedule c, etc. but basically, the net profit from that business will be taxed at your marginal tax rate. 

and yes you can deduct the expenses of the property, within limitations. 

Edited December 2, 2023 by Dbeasy