This has been such an incredibly thorough and helpful discussion! As someone who's been struggling with STR tax classification for my property in Arizona, I can't thank everyone enough for breaking down the complexity of active vs passive income determination. What really struck me is how many of us were fixated on that 750-hour rule without understanding the other material participation tests. @CosmicCowboy's list of the 7 tests was a revelation - I've been doing substantially all the work for my desert rental property (guest management, maintenance, pool/spa upkeep, landscaping in extreme heat, dealing with Arizona's unique STR licensing requirements) but never realized that could qualify me for active status regardless of total hours. The time-tracking insights from @Connor Gallagher and others have convinced me to start documenting everything immediately. Between monsoon season preparations, managing the property during Phoenix's brutal summers, and navigating the complex web of city/county STR regulations here, I'm probably putting in way more hours than I initially calculated. One thing that's particularly relevant for Arizona STR owners - we deal with a lot of HVAC maintenance and energy management issues due to extreme temperatures, plus pool/spa maintenance year-round. That specialized property management work definitely supports the "substantially all the work" classification. I'm planning to review my situation with my CPA using all 7 tests instead of just assuming I'm stuck with passive income classification. This thread has potentially saved me thousands in taxes - thank you all for sharing your real-world experiences and cutting through the IRS complexity!

Reading through this entire discussion has been absolutely enlightening! I'm currently in the research phase of purchasing my first STR property and had no idea how critical the active vs passive income classification could be for tax purposes. What's particularly valuable is seeing how many different scenarios qualify for active income status beyond just the 750-hour rule. @CosmicCowboy's breakdown of the 7 material participation tests completely changed my understanding - I was under the impression that if you couldn't hit 750 hours, you were automatically stuck with passive classification. The emphasis on detailed time tracking from day one really resonates with me. It seems like many of you discovered you were putting in significantly more hours than initially realized once you started documenting everything properly. I'm definitely going to implement a tracking system before I even close on a property. One question for the group: For those who successfully transitioned from passive to active classification, did you need to amend previous years' tax returns, or does the reclassification only apply going forward? I'm trying to understand if there's potential to recover taxes from prior years if someone discovers they actually qualified for active status all along. Also, are there any red flags or common mistakes that might trigger an IRS audit when claiming active income status for STR properties? I want to make sure I'm setting myself up for success from the beginning rather than trying to fix classification issues later. Thanks to everyone for sharing such detailed, real-world experiences - this thread should be required reading for anyone entering the STR space!

Based on your situation, you definitely need to file Form 1065 and K-1s even with zero revenue. I went through this exact scenario two years ago with my consulting partnership. A few key points from my experience: 1. **Filing is mandatory** - The IRS requires partnership returns regardless of income level, and the penalties can add up quickly ($195 per partner per month). 2. **Your startup expenses are valuable** - Don't overlook deductions for business formation costs, professional fees, software subscriptions, etc. These can create losses that flow through to your personal returns. 3. **Extension strategy** - If you've missed the March 15 deadline, file Form 7004 immediately for an extension to September 15. Even if the extension request is late, it stops additional penalties from accumulating. 4. **Software options** - I used TaxAct Business which handled our simple partnership return well for around $150. The key is making sure it properly allocates expenses between partners according to your agreement. Don't dissolve the business just because of first-year filing complexity. Once you get through this initial return, future years become much more routine. The infrastructure you've built has value, and these startup costs will benefit you on your taxes. Feel free to ask if you need clarification on any specific expenses or allocation issues!

I've been through this exact situation with my tech consulting partnership! A couple of additional tips that might help: **Don't forget about Section 199A deductions** - Even though you had a loss this year, understanding how the 20% qualified business income deduction works for future profitable years is important. Partnerships typically qualify, so keep this in mind for your business structure planning. **Consider your state filing requirements too** - Most states also require partnership returns even with zero income. The deadlines and penalties vary by state, so make sure you're not just focusing on federal requirements. **Documentation is key** - Start a simple spreadsheet now tracking all business expenses with dates, amounts, and business purposes. This habit will save you tons of time in future years and help if you ever get audited. One thing I wish someone had told me: if you're planning to be active in the business going forward, make sure your partnership agreement clearly states you're both "general partners" or "managing members" (if LLC). This ensures you can fully deduct losses against other income without passive activity limitations. The first year is definitely the most confusing, but once you get through this filing, everything becomes much more routine. You've got this!

Practical advice from someone who had a smaller lottery win ($230k): You absolutely need to pay your taxes correctly, but there are legal ways to maintain privacy. I formed an LLC to claim my prize (allowed in my state), had a proper tax attorney handle everything, and I live in the same neighborhood as before. I did buy a nicer car but nothing flashy like a Lambo. The key is not making sudden, dramatic lifestyle changes that attract attention. The IRS knows about your winnings, but they don't alert local police about lottery winners. As long as you're paying proper taxes, most people will never know unless you tell them or start spending extravagantly.

This is such a thoughtful question! I've been researching this topic myself (also daydreaming about winning lol). One thing I learned that might help is that many financial advisors recommend what they call a "staged reveal" approach to your lifestyle changes. Basically, instead of suddenly buying a Ferrari and mansion, you gradually upgrade your lifestyle over 6-12 months in ways that seem plausible. Maybe start with paying off existing debt, then a modest house upgrade, then a nice (but not exotic) car. This creates a more believable narrative if anyone asks - you could say you got a promotion, inheritance from a relative, or made some good investments. The privacy laws in anonymous states are really just about keeping your name out of the newspaper and preventing people from knowing you won. But you're right that the IRS will absolutely know, and so will anyone you work with to claim the prize (lawyers, financial advisors, etc.). I think the key is having a solid plan before you even claim the prize, which is why so many people recommend assembling a team of professionals first. They can help you structure everything legally while maintaining as much privacy as possible from the general public.

Have you checked if your company would let you decline some of the higher-value items? I was in a similar program and was able to opt-out of receiving certain products that would have significantly impacted my taxes. Some companies are flexible about this because they understand the tax implications.

This is such a great question and something a lot of people don't think about until they get surprised at tax time! One strategy I haven't seen mentioned yet is to set up a separate savings account specifically for the tax liability on these products. When you receive each item, immediately calculate roughly 25-30% of its value (depending on your tax bracket) and transfer that amount to the savings account. This way, when tax season comes around, you'll have the money set aside and won't be scrambling to pay the additional taxes owed. Also, make sure you're documenting everything - take photos of the items, keep records of when you received them, their stated retail values, and any work-related use. This documentation could be helpful if you need to discuss valuations with your employer or if you decide to work with a tax professional. The brand ambassador role sounds like an amazing opportunity - with some good planning, you can enjoy the benefits without the tax season stress!

Does anyone know if a SEP IRA has the same first-time homebuyer exception as a regular IRA? I'm in a similar situation with my SEP and might need to take some money out for a down payment. Trying to avoid that 10% penalty if possible!

I've been following this thread and wanted to share my experience since I was in almost the exact same boat as Carmen. I had a SEP IRA from my consulting business and kept contributing after I went back to regular employment, thinking I was being smart by continuing to save for retirement. The key thing I learned (the hard way) is that SEP IRA contributions are ALWAYS considered pre-tax, regardless of what account you fund them from. When I was contributing from my personal checking account, I should have been taking those deductions on my tax return - I basically gave the government free money for two years before I figured this out. Here's what I wish someone had told me earlier: if you've been making SEP contributions without taking the deductions, you can file amended returns to get those taxes back. I was able to go back 3 years and recovered about $2,800 in overpaid taxes. The forms you need are 1040X for each year. Also, regarding withdrawals - unfortunately there's no way to separate "pre-tax" vs "post-tax" money in a SEP IRA because technically it's all pre-tax. Any withdrawal will be taxable income plus the 10% penalty if you're under 59½ (unless you qualify for an exception like the homebuyer one mentioned above). My advice: keep the money in the retirement account if you can, and definitely look into filing amended returns if you missed those deductions!