But wouldn't Section 1231 only apply if the property was used in a trade or business? OP said it was flipped within 10 days and never rented out, so I don't think it was ever placed in service for the rental business.

You're absolutely right, @ApolloJackson. For Section 1231 treatment, the property would need to be used in a trade or business or held for the production of income. Since this property was never placed in service for rental purposes and was flipped immediately, it wouldn't qualify for Section 1231 treatment. The analysis really comes down to the capital asset vs. ordinary income question that others have outlined. Given that it was never used in the business operations and was an isolated transaction, Schedule D still seems like the most defensible position for @Jibriel.

Great point about the QBI implications! I hadn't thought about that ripple effect. The Section 199A deduction could definitely be impacted depending on how this gets characterized. Just wanted to add - as someone relatively new to complex S-Corp issues - would a private letter ruling really be worth it for a one-time transaction like this? I know they're expensive (isn't it like $10k+ just for the filing fee?). Given that this seems like a pretty straightforward application of existing case law and the multi-factor test @Charlie mentioned, wouldn't the cost outweigh the benefit unless the client plans to do more flips in the future? That said, with $135K at stake, I can see the argument for extra certainty. Just curious about your thoughts on when PLRs make sense for practitioners like us dealing with these gray area situations.

Thank you so much for the professional perspective! As someone new to partnership taxation, this clarification about the different capital account methods is really helpful. I had no idea there were multiple ways partnerships could track these balances. Your point about basis never going below zero for tax purposes is particularly reassuring. I've been worried that my negative capital account meant I was somehow "in the red" from a tax standpoint, but it sounds like the actual tax calculation is more nuanced. Could you elaborate a bit on the Section 731 issue you mentioned? If I understand correctly, you're saying that distributions exceeding my tax basis (not capital account) would be taxable gain? Given that my partnership is real estate with significant debt allocations, I'm hoping my actual tax basis is much higher than what the capital account shows, but I want to make sure I understand the potential consequences. Also, regarding the recourse vs nonrecourse debt distinction - is this information typically shown somewhere on the K-1, or do I need to ask the partnership directly? I want to make sure I'm tracking my at-risk limitations correctly going forward.

Excellent questions! Yes, Section 731 says that if you receive distributions that exceed your adjusted basis in the partnership, the excess is treated as gain from the sale or exchange of your partnership interest. So you're correct - it's based on your tax basis, not the capital account balance shown on the K-1. For real estate partnerships with debt, your basis typically includes your share of partnership liabilities, which often makes your true tax basis much higher than your capital account. This is exactly why so many people get confused when they see negative capital accounts but don't actually have tax issues. Regarding recourse vs nonrecourse debt information - unfortunately, this detail usually isn't broken out clearly on the standard K-1 form. You'll typically need to request a supplemental statement from the partnership or look for it in the partnership agreement. Some partnerships provide this in their year-end tax package, but many don't unless specifically asked. For at-risk purposes in real estate: generally, your share of qualified nonrecourse financing (like most real estate mortgages) counts toward your at-risk amount, but recourse debt you're not personally liable for doesn't. This distinction becomes crucial if you're trying to deduct partnership losses. I'd recommend asking your partnership for a detailed basis and at-risk calculation statement - most well-managed partnerships can provide this information to help partners track their positions accurately.

This is such an important point that I hadn't even considered! As someone who's just starting to navigate K-1 reporting for the first time, I was so focused on getting the federal side right that I completely overlooked potential state complications. I'm in New York, and now I'm wondering if I need to look into additional state-specific requirements for my partnership reporting. Did you have to amend your state return, or were you able to catch the issue before filing? Also, for those of us tracking basis going forward as recommended throughout this thread, should we be maintaining separate calculations for state purposes too, or do most states generally follow the federal basis rules? I'm already feeling overwhelmed by the federal tracking requirements, so I'm hoping the state side doesn't add too much additional complexity! Thanks for bringing this up - it's exactly the kind of detail that could easily slip through the cracks until it becomes a problem.

This health insurance thing tripped me up last year. My tax software didn't explain it well and I ended up having to file an amended return.

Great questions! For the timing issue, when your S-Corp reimburses you in April for expenses you paid in January-March, those expenses are generally deductible by the S-Corp in the tax year when the expenses were actually incurred (2024), not when the reimbursement happens. This is because S-Corps typically use the cash method of accounting but the business expense occurred when you paid it on behalf of the company. However, make sure you get those reimbursements processed before you file your 2024 S-Corp return. The IRS wants to see that the corporation actually paid or committed to pay the expenses in the same tax year they're being deducted. One more thing to add to your list - document everything! Keep receipts, bank statements, and create a paper trail showing these were legitimate business expenses. For your cell phone, maybe keep a log for a few months showing business vs personal calls to support that 70% business use percentage. The IRS loves documentation if they ever come knocking!

This is actually an interesting tax planning opportunity. Since all the LLCs are disregarded entities flowing to the same partnership tax return, Section 179 deductions can be taken regardless of which LLC purchased the equipment. The limit applies to the taxpayer (the partnership), not each individual LLC. So if the property services LLC buys equipment using funds transferred from YouTube earnings, the partnership can take the Section 179 deduction against all business income, including YouTube revenue. Just make sure to document that the equipment is actually used for business purposes in the property services operation.

Really appreciate this detailed breakdown! The arm's length transaction point is something I hadn't fully considered. Since I'm essentially moving money between my own entities, it's easy to forget that the IRS still wants to see market-rate documentation. Quick question on the S-Corp election - if I elect S-Corp status for just the holding company, would that create complications since the YouTube and PropertyServices LLCs are disregarded entities owned by it? Or would I need to make the election for all entities to keep things clean? With $175k in income, the self-employment tax savings could definitely be worth the payroll complexity.

Ugh, this is exactly why I'm second-guessing using PayPal! The uncertainty about when you'll actually get your money sounds awful. Did you end up having to provide any extra documentation to get the hold lifted, or did it just release automatically after the week?

It released automatically after about 6-7 days, no extra documentation needed thankfully. But the whole time I was stressed thinking I'd have to jump through hoops to prove it was legit. The lack of clear communication from their support team made it way worse than it needed to be!