I faced this exact scenario in 2022 and can confirm your understanding is correct. The timing that matters is when you originally took out the mortgage, not when it was canceled or forgiven. In my case, I had purchased the home in 2019 as my primary residence with a conventional mortgage. Due to job relocation, I moved out in 2021 and started renting it out. When I went through a short sale in 2022, I was worried the $45,000 in forgiven debt wouldn't qualify for QPRI exclusion since it was no longer my main home. However, after consulting with a tax professional and reviewing IRS Publication 4681, it was clear that the debt qualified because the home WAS my principal residence when I acquired the mortgage. The exclusion applied in full. Keep your original loan documents and any evidence showing the property was your main home when you took out the mortgage (utility bills, voter registration, etc.). The IRS may request this documentation to verify the original qualification. Also remember that if you've claimed depreciation on the property while it was a rental, you may need to recapture some of that depreciation, but that's a separate issue from the QPRI exclusion.

I went through this exact situation last year and can add some perspective to what others have shared. My mortgage originated in 2019 when the property was definitely my primary residence, but I had to move for work in 2021. When the lender canceled about $67,000 in debt through a deed-in-lieu in 2023, I was initially panicked thinking I'd owe taxes on the full amount. After working with a tax professional, we confirmed that the debt absolutely qualified for QPRI exclusion. The critical factor is that acquisition indebtedness test - the loan was used to purchase what was my main home at the time of origination. One thing I'd add that hasn't been mentioned: make sure you understand the basis reduction requirements that come with claiming the QPRI exclusion. When you exclude canceled debt from income under QPRI, you generally have to reduce your basis in the property by the amount excluded (though since the property was likely sold/foreclosed, this may not be relevant in your case). Also, keep excellent records. I kept copies of my original loan application, purchase contract, utility bills from when I lived there, and voter registration records from that time period. The IRS never asked for them, but having that documentation gave me peace of mind that I could prove it was my principal residence when I took out the mortgage.

Does anyone have a good spreadsheet template for tracking multiple assets for Form 4562? My professor wants us to show our work and I'm terrible at setting up Excel formulas for depreciation calculations.

Great question about Form 4562! Just to add to what others have said - when you're combining multiple 7-year assets on line 19c, make sure you're also considering whether any of them qualify for bonus depreciation. For 2023, you can still take 80% bonus depreciation on qualifying new property, which would be claimed before regular MACRS depreciation. If you elect bonus depreciation on some assets but not others (even within the same property class), you'll need to separate them on different lines of Part III. So you might have one line for 7-year assets taking bonus depreciation and another line for 7-year assets using only regular MACRS. Also, don't forget about the Section 179 election limit - for 2023 it's $1,160,000 with a phase-out starting at $2,890,000. If your total equipment purchases are under these thresholds, you might want to consider Section 179 instead of or in addition to MACRS depreciation for maximum first-year deduction. Keep detailed records as others mentioned - asset description, cost, date placed in service, business use percentage, and which depreciation method you chose for each asset. This will save you headaches later!

Is there any way to find out if your employer's 401k plan supports the mega-backdoor option without having to call them? Mine has a website but its terribly designed and the FAQs don't mention anything about after-tax contributions or in-plan conversions.

Great question about the mega-backdoor Roth! To address your specific situation - since your employer contributions are already bringing you close to the $69k limit, you likely don't have much room for the after-tax contributions that make the mega-backdoor strategy possible. Regarding your $22.5k traditional 401k contributions, you generally can't go back and convert those to Roth within the 401k after they've already been made. However, you might be able to roll them to a traditional IRA and then do a Roth conversion (though this would trigger taxes on the converted amount). For previous years, unfortunately you can't retroactively make mega-backdoor Roth conversions. The contribution limits and tax years are fixed once they've passed. But going forward, if you have any room between your total contributions and the annual limit, you could potentially start using the strategy. I'd recommend checking with your plan administrator to see exactly how much contribution space you have after employer matching, and whether your plan allows after-tax contributions and in-plan Roth conversions. Even a small amount of extra Roth space could be beneficial over time.

Has anyone dealt with the health insurance part of this? When my ex and I split claiming our kids, we ran into issues with the premium tax credit for health insurance. Only the person who claims the kid as a dependent can claim their health insurance costs for tax credits.

This is a great question that comes up a lot! Yes, your daughter and her ex can absolutely each claim one child on their separate tax returns. The key rule is that each child can only be claimed as a dependent by one parent per tax year - but there's no requirement that all children must be claimed by the same parent. Since they co-parent well and split time fairly evenly, they just need to agree on who claims which child and stick to that arrangement. I'd recommend they put this agreement in writing to avoid any confusion down the road. One important thing to consider though - they should look at the bigger tax picture before deciding. The parent who claims a child gets all the related tax benefits for that child (Child Tax Credit, Earned Income Credit if eligible, Head of Household filing status, etc.). Given their income difference ($42K vs $65K), your daughter might benefit more from certain credits that phase out at higher incomes. They might want to run the numbers both ways to see which arrangement gives them the best combined tax benefit.

Anyone else notice that the tax software doesn't clearly explain this stuff? I had the same confusion last year. Had to dig deep into the actual forms to see that the software was calculating everything correctly but just displayed it confusingly on the summary screens.

This is exactly the kind of situation where having a clear breakdown is crucial! I went through something similar when I sold my rental last year. One thing that helped me was creating my own simple spreadsheet to track the math: - Total gain: $202k - Depreciation recapture (taxed up to 25%): $45k - Remaining long-term capital gain (taxed at 15% for MFJ): $157k Then I compared this to what showed up on Form 4797 Part III and Schedule D in my software. The key is that even though line 7 shows the full $202k, the tax calculation behind the scenes should be applying different rates to each portion. If you want to double-check your effective tax rate, calculate what you'd expect to pay: ($45k × 25%) + ($157k × 15%) = $11,250 + $23,550 = $34,800 total. Then see if that matches what your software is calculating for tax on this gain. This helped me confirm everything was working correctly even though the summary screens were confusing.