I went through this exact same situation last year and can confirm what others have said. The IRS publications really are confusing on this point, but the key is understanding that "space within the living area" gets special treatment. Here's what I did based on advice from a tax attorney: 1. **Form 8949**: Reported the entire house sale here, claimed my $250k primary residence exclusion 2. **Schedule 1, Line 8z**: Reported all depreciation I had claimed over the 8 years I rented out two bedrooms The depreciation recapture was about $18,000 in my case, which got taxed as ordinary income at 25%. What surprised me was that I could still claim the full primary residence exclusion on the remaining gain, even though I had been renting out rooms. One thing I wish I had known earlier - if you made any capital improvements specifically to the rented rooms (like adding a bathroom or upgrading flooring just for those rooms), you might be able to add those to your basis calculations. It's worth reviewing your records for any room-specific improvements. Also, double-check that you've been consistently using the same percentage for depreciation each year. The IRS will expect your recapture calculation to match what you actually claimed on your Schedule E forms.

I'm dealing with a very similar situation right now - sold my primary residence last year after renting out a basement apartment for 6 years. The confusion around Publication 523 is real! What helped me understand it was realizing that the IRS is trying to simplify things for homeowners who rent space within their primary residence. You don't have to do the complex allocation between personal and rental use that you'd need for a separate rental property. Here's my understanding based on research and consultation with a CPA: **For your situation (rooms within the house):** - Report entire sale on Form 8949/Schedule D - Claim your $250k primary residence exclusion - Report depreciation recapture on Schedule 1, Line 8z as ordinary income **Key point:** The depreciation recapture can't be excluded under Section 121, so you'll pay ordinary income tax on that portion (maxed at 25%). One thing I learned is to make sure you have good documentation showing exactly how you calculated the rental percentage each year. I used square footage, but some people use room count or other methods. Just be consistent. The good news is that even with the depreciation recapture, you still get to use the primary residence exclusion on the rest of your gain, which can save thousands in taxes compared to treating it as a pure rental property sale.

Great decision, Sean! This thread has been incredibly educational for everyone involved. As someone who works in financial compliance, I see these types of schemes regularly, and they always follow the same pattern - complex structures that exist primarily for tax avoidance rather than legitimate business purposes. What's particularly valuable about this discussion is how it demonstrates the importance of community knowledge sharing. The collective experiences shared here - from those who nearly fell for similar schemes to those who got audited - create a comprehensive picture that's much more powerful than any single professional opinion. For future reference, the IRS publishes an annual "Dirty Dozen" list of tax scams that often includes these types of abusive tax shelters. They also maintain a list of "reportable transactions" that must be disclosed on tax returns, and many of these software license/LLC arrangements fall into that category. The fact that you trusted your instincts and sought out community input before making a decision shows exactly the kind of due diligence that protects people from financial harm. Your experience will undoubtedly help others who find this thread after being approached by similar companies. Thanks for sharing your story and for the follow-up on your decision. It's a perfect example of how asking the right questions and getting multiple perspectives can save you from very expensive mistakes.

As a tax professional who's been dealing with these schemes for over a decade, I want to applaud everyone who shared their experiences here - this is exactly the kind of community knowledge sharing that protects people from financial predators. Sean, your decision to walk away was absolutely the right call. What strikes me about the My Health CCM pitch is how it hits every single checkbox on the IRS's list of abusive tax shelter characteristics: artificial complexity, disproportionate tax benefits, entity creation solely for tax purposes, and most tellingly, the insistence on using their "approved" professionals. I've represented clients in audits involving virtually identical structures, and the outcomes are consistently bad. The IRS has specific teams dedicated to unwinding these arrangements, and they're very good at it. They'll typically challenge both the inflated valuation of the software licenses AND the business purpose of the entire structure. For anyone else reading this who might be considering similar arrangements, here's my professional advice: if a tax strategy requires you to create new entities, involves transactions primarily with the company selling you the strategy, or promises tax benefits that seem disproportionate to your economic risk, get multiple independent opinions from tax professionals who have ZERO financial relationship with the promoter. The legitimate tax planning world has plenty of genuine opportunities that don't require elaborate schemes or artificial time pressure. Trust your instincts, do your due diligence, and remember that the best tax strategy is one that makes business sense first and tax sense second. Thanks again to everyone who contributed to this invaluable discussion!

I went through something very similar when my father passed and left his house in an irrevocable trust. A few additional things to keep in mind: First, make sure you get a professional appraisal of the property as of the date of death - this establishes your new "stepped-up basis" for tax purposes. Even if you're not planning to sell now, you'll need this documentation if you ever do sell in the future. Second, check if your state has any specific trust termination requirements. Some states require you to formally dissolve the trust through probate court or file specific paperwork, even after all assets are distributed. Third, since your brother is living in the house, you might want to consider having a formal rental agreement or family agreement in place. This can help clarify things for tax purposes and avoid any potential issues down the road if one of you wants to sell your share. The IRS generally doesn't consider the transfer from trust to beneficiaries as a taxable event, but definitely keep all your trust documents and the death certificate - you may need them for future reference. Good luck navigating this!

Great question about the family agreement! It doesn't need to be filed with tax returns, but having something in writing can be really valuable for documentation purposes. The IRS generally looks at the substance of arrangements rather than just formal paperwork. Regarding gift tax implications - this is actually a common issue with inherited property. If one sibling lives rent-free while the other maintains ownership, the IRS could potentially view this as the non-resident sibling making a gift of their share of the rental value to the resident sibling. However, there are a few ways to handle this: 1. You could establish a fair market rent and have the resident sibling pay it, then split the rental income according to ownership shares 2. The resident sibling could be responsible for all maintenance, taxes, insurance, and upkeep in lieu of rent 3. You could formalize an arrangement where the resident sibling is gradually buying out the other's share The key is having documentation that shows this isn't just a one-sided gift. Many families handle this without issues, but it's worth discussing with a tax professional familiar with your specific situation and state laws. The annual gift tax exclusion is currently $17,000 per person, so depending on the property value and rental market, you might not hit gift tax thresholds anyway.

As a newcomer to this community, I've been following this incredibly detailed discussion and wanted to add my perspective as someone currently navigating a very similar situation with my elderly father. What's struck me most is how this conversation has revealed the sheer complexity of what initially seemed like a straightforward question. The intersection of gift tax implications, basis step-up rules, Medicaid lookback periods, state-specific property tax reassessments, and family dynamics creates so many potential pitfalls. Reading through everyone's experiences, I'm particularly concerned about the timing dilemma that several people have highlighted. There's this pressure to act quickly because of the 5-year Medicaid lookback, but also the very real risk of making an expensive mistake by rushing into the wrong strategy. In our case, my father's health has been declining faster than we anticipated, which adds even more urgency to an already stressful decision-making process. I'm also realizing how much the "right" answer varies by state. The California Prop 19 changes, different Medicaid rules, varying property tax policies - it really drives home that generic online advice can only take you so far when dealing with something this consequential. The professional consultation advice shared here seems crucial, but I'm finding it challenging to locate attorneys who truly understand both the tax planning AND Medicaid asset protection sides. Has anyone found success with specific questions to ask when vetting professionals to ensure they have experience with these intersecting issues? The tools mentioned (taxr.ai for analysis and Claimyr for IRS contact) seem like helpful resources for initial research, but this discussion has convinced me that professional guidance is essential for actually implementing a strategy given all the state-specific variables and potential long-term consequences.

As a newcomer to this community, I've been reading through this extensive discussion and am amazed by how comprehensive everyone's responses have been. This conversation has really opened my eyes to just how complex property transfer decisions become when you're dealing with aging parents and potential long-term care needs. What I find most valuable about this thread is how it's evolved from the original question to cover so many interconnected issues that most people (myself included) wouldn't initially think about - from the step-up in basis implications to homestead exemption loss to family dynamics and documentation needs. The tools and resources mentioned throughout this discussion seem really helpful for initial research. The taxr.ai tool for personalized analysis and Claimyr for actually reaching IRS agents could save a lot of time in the information-gathering phase. But what's become crystal clear is that the state-specific nature of so many of these rules makes professional consultation essential rather than optional. I'm particularly struck by the timing pressures everyone has mentioned - the need to start the Medicaid lookback clock while also taking enough time to fully understand all implications. For those of us dealing with parents whose health is declining, this creates real urgency around decisions that could have decades-long financial consequences. Thank you to everyone who has shared their experiences and expertise. This discussion has given me a much better framework for approaching similar decisions with my own family, even though it's also made clear just how much professional guidance we'll need to navigate all these complexities successfully.

I've been audited before (not fun) and the IRS specifically questioned my "office supplies" category which included snacks and drinks. The auditor told me personal consumption items aren't deductible even if they help you work. BUT they did allow the coffee service I had for client meetings as a 50% business meal expense. Keep good records of who visited and when if you're claiming those contractor coffee expenses!

This is such a common question for home-based business owners! I went through the same confusion when I started my consulting business. The key thing I learned is that the IRS looks at whether an expense is "ordinary and necessary" for your business AND whether it's primarily for business vs. personal use. For your daily coffee and energy drinks that you consume while working, these are generally considered personal expenses because you'd likely drink coffee/beverages regardless of whether you were working or not. The IRS views this as personal consumption that happens to occur during work hours. However, you're absolutely right about the contractor situation! When you provide refreshments to contractors, clients, or other business visitors in your home office, those costs are typically deductible as business entertainment expenses (usually at 50% of the cost). Just make sure to keep detailed records - date, who visited, business purpose, and receipts. One strategy some business owners use is setting up a dedicated "client refreshment" area with separate supplies specifically for business visitors. This makes it easier to track and justify those deductions while keeping your personal consumption separate. The bottom line is: be conservative with personal consumption items, but don't miss out on legitimate deductions for business hospitality!