That's a really good point I hadn't considered. Looking back at our contract, it specifically describes the fee as "payment for client acquisition services" rather than a revenue share. Would that language definitely make it a service requiring a 1099?

Based on that contract language, yes, it would most likely be considered a payment for services that requires a 1099. When the contract specifically calls it "payment for client acquisition services," the IRS would typically view that as you purchasing a service from them. If it were structured as a revenue split or commission arrangement, the contract would usually contain language about "shared revenue" or "commission splits" and might include different terms about the business relationship. The specific language in contracts really matters when determining tax reporting requirements, so you're on the right track focusing on those exact terms.

Not everyone can afford a CPA, especially small businesses just starting out. I do my own taxes to save money and questions like this are really important for DIY tax filers.

That's a fair point. I didn't mean to sound dismissive. I started doing my own taxes too but switched to a CPA once these business relationships got complicated. For DIY filers, I think the main thing is documenting everything clearly - get those W-9s from anyone you pay, track all payments meticulously, and maybe consider investing in good accounting software that flags when you need to issue 1099s. The peace of mind is worth it, even if you're handling tax filing yourself.

What counts as "detailed records"? I've been keeping receipts but not much else. Should I be doing more?

Receipts are a good start, but you should also note exactly what each expense was for. Create a spreadsheet that categorizes everything as either a repair or improvement. Take dated photos before, during, and after major work. Keep copies of contracts with any contractors. For example, don't just have a receipt that says "bathroom work - $3,500." Have documentation showing it was a complete bathroom remodel with new fixtures, tile, etc. This makes it clear it's a capital improvement rather than a repair. The IRS can get very picky about what qualifies as an immediate deduction versus what must be depreciated.

I've used TurboTax for my two rental properties for about 3 years. It works fine for basic rental situations but gets confusing with complex renovations. There's a section specifically for rental properties where you can enter all your income and expenses. It'll walk you through depreciation too.

Thanks for this breakdown - super helpful! Quick question: If I sell a rental after owning for the full 27.5 years, would I still have depreciation recapture? Or would it be fully depreciated at that point?

If you sell after the full 27.5 years, you would still have depreciation recapture, but it would be on the entire depreciable amount of the building. After 27.5 years, your basis in the building portion would be $0 (assuming no improvements were made along the way). So if you sold, all of the building portion of your sale price would be subject to depreciation recapture at the 25% rate. The land portion would be calculated separately as a capital gain. Many investors avoid this recapture tax by doing 1031 exchanges into new properties, which allows you to defer both the capital gains tax and the depreciation recapture tax. However, this is just deferring the tax - not eliminating it completely.

Unfortunately, converting to a primary residence doesn't help with depreciation recapture. You'll still have to pay recapture tax on ALL depreciation taken while it was a rental. The primary residence conversion can help with capital gains (you might qualify for the $250k/$500k exclusion), but the IRS specifically requires recapture of depreciation regardless of the property's status when you sell. The only way to avoid recapture is with a 1031 exchange into another investment property, but that just defers it - you'll face recapture eventually when you finally sell without exchanging.

This is really helpful - I had no idea there was a threshold at $25k! Do you think I should try to pay $3k now to get under that limit? Would that speed things up or just complicate the application I already submitted?

Making a payment to get under the $25k threshold would definitely help speed things up. The streamlined process is much simpler and typically processes faster. It won't complicate your existing application - the IRS will just see that you've made a payment and recalculate your plan based on the new balance. Just make sure you use Direct Pay on the IRS website and select the correct tax year and reason for payment (installment agreement request). A $3k payment now would also save you quite a bit in penalties and interest over time.

Yes! The IRS2Go app is actually really good for making payments. It links directly to IRS Direct Pay and the other payment processors. I used it last year when I was in a similar situation and it worked perfectly. The interface is much easier than navigating the main IRS website.

What exactly counts as "reasonable" interest? My parents want to charge me 1% interest on a house loan which is obviously way below market rate. Is that going to be a problem?

The IRS publishes what's called the Applicable Federal Rate (AFR) each month, which is the minimum interest rate they consider legitimate for loans. These rates are typically lower than commercial rates. For example, as of last month, the long-term AFR (for loans over 9 years) was around 3-4%. If your loan charges less than the applicable AFR, the IRS might "impute" interest, meaning they treat the loan as if it charged the minimum rate even if it doesn't.

Without proper documentation, the IRS could potentially reclassify that $200k as a gift rather than a loan, which could have significant consequences. The annual gift tax exclusion is only $17,000 per person (as of 2023), so amounts beyond that would count against your grandparents' lifetime gift/estate tax exemption.