I have just recently purchased and closed on a fourplex and will be living in one of the units and renting the other three out. I also bought John Hyre’s course on bookkeeping and think it is great, but i am unsure of how to treat this property. Would i treat the three units as a triplex for bookkeeping purposes and divide the mortgage interest, taxes, insurance, depreciation, and all the other property specific expenses between my personal residence (25%) and treat 75% of the aforementioned expenses as business expenses? Thank everyone in advance for help on this.
talk to your accountant as they will be better to advise you and your individual situation by looking at your whole tax picture.
and don’t expect the accountant to know off the top of his/her head. This is a rare situation. i do remember that there are specific rules to cover this.
Aside: One of my first properties was an owner occupied 4 plex i bought with HUD financing, that was 17 years ago, I still own it. There is no point in selling it, I have a 2% margin adjustable that currently sits at 2.25% fully indexed, and the capital gains taxes would be so high on sale i don’t see that it would be a good idea to sell even after I have paid the loan off in 13 years. I suspect that if you have a 4% loan on it you will probably just end up keeping it forever like I am.
Thanks for the quick responses. I figured an accountant would be involved, but i am just trying to get some basic knowledge so i can ask the right questions when i go see one. I also bought it using a VA loan which i think worked out great, but adds even more complexity to the issue. I will have to see what an accountant can tell me about this and I can let anyone know if they’re interested. Thanks.
I had a similar situation a long time ago. At that time, I divided most things 2/3 (rental) and 1/3 (personal residence). There is an impact to when you sell as the rules not exempting the gain on a personal residence is effected.
As it was a long time ago, I would check with a tax attorney or a CPA. Ask around so you can find one who is used to RE.
Owner Occupied Fourplex Accounting
Your question is fairly basic, and any experienced accountant should be able to help you set up your accounts. You are not asking a tax question, but the tax treatment for your property sort of dictates how you should do your accounting.
You have a four-plex, which is probably really four individual (separate) units that may share some common elements, such as a roof. Hopefully, each unit is separately metered for water and power. Set up your accounting to treat each unit as a separate asset, with a separate cost basis and a separate depreciation schedule for each rental unit. In essence, you have four properties that you will track in your accounting system. Your residence unit will have some expenses that are not deductible, while everything you spend on the rental units is deductible. Track each unit’s income and expenses in a separate account within your accounting software.
The unit you occupy is your personal residence. As your personal residence, all of your repair, maintenance, and upkeep costs will be personal expenses that are not tax deductible. You can take a Schedule A (1040) deduction for 25% of the property taxes and mortgage interest attributed to your unit, provided you itemize your deductions. Hazard insurance for your residence is a personal expense and not deductible. If you don’t itemize, you forfeit these deductions. This should be fairly easy to do yourself if you use accounting software such as Quickbooks or even a personal finance accounting package such as Quiicken.
Assuming that your property taxes, mortgage interest, and hazard insurance is a single bill for all four untis, your basic approach for the three rental units is to allocate 25% of the property taxes, hazard insurance, and mortgage interest to each unit. All other direct costs should be charged to the specific property account to which the cost applies. For example, you have a vacancy in one of the rental units, then charge the advertising expense to that unit’s account. You have a plumbing repair in another unit, charge the bill to the specific account for that unit.
You can not depreciate the land under your four-plex and you can not depreciate your residence unit.
If this doesn’t answer your question, hopefully I pointed you in the right direction. If you talk to an accountant who suggests a more complicated accounting approach, talk to someone else. My idea is to keep it as simple as possible so I can do the accounting myself. I do all my personal and rental accounting in Quicken. It does everything I need it to do and is more intuitive than Quickbooks. BTW, I have Quickbooks and John Hyre’s KISS bookkeeping course. I have taken business accouunting classes in college so I am not daunted by the task or the software.
I don’t understand John Corey’s comment about how the rules exempting gain on your personal residence are affected. I don’t see it. Unless the tax code changes, the sale of the property is treated on your tax return as the sale of four units. Each unit has a sale price, a cost basis, and a profit or loss. Your profit (up to $250K) on the sale of the residence unit can be excluded from capital gains taxes, while the profit allocated to each of the three rental units is taxable unless you use a 1031 exchange to defer the taxes. But this is a question for another day when you are planning to sell.
We were saying similar things. The 4 plex is more or less two virtual buildings. One is a primary residence and the other is a tri-plex rental property. The ability to exempt the gain on the primary residence is not an issue. The tri-plex can be rented, depreciated, etc. It is not a primary residence so the 3 units would not be covered from the primary residence exemption from how I understand things.
Accounting is not so hard these days. There are some pro tools out there like quickbooks, ZipBooks, Sage etc. You can handle your bookkeeping if you are so good at MS Excel.
Dave T’s analysis is right on on the accounting issues. I have an MBA in finance, and attended Real Estate courses at the NYU Real Estate school, and I would suggest to anyone with investments in real estate or any business, which I also owned, to use a CPA. I learned the hard way. There are several reasons for this:
I done my taxes myself for a while. After my 1st CPA retired, and I thought I knew enough not to use one for a few years. When I found my current CPA, was advised there were some deductions I missed, and was too late and cumbersome to refile. I would have been ahead paying accounting fees. CPAs keep themselves abreast of the tax laws which is not my expertise.
I tried doing my own workman’s comp at my business and screwed up big time. My CPA at the time knew the state workman’s comp examiner in the area, told them he had no idea I was trying to do it on my own, and he will make the corrections. The workman’s comp inspector who came to my office growled at me originally, smiled after speaking with my CPA and after the phone call, said, “I’ll meet with your CPA and have it straightened out”.
Zipbbooks, Sage or MS Excel would not help me in these cases.