This is exactly the kind of confusion I had when I first started renting out part of my home! The key insight that helped me was understanding that you're essentially running two separate "businesses" - your personal residence and your rental property - that happen to share the same physical structure. Here's what I learned: When you allocate 50% of your mortgage interest to Schedule E (rental), that portion is completely separate from personal itemized deductions and isn't subject to the $750k mortgage interest limitation at all. It's a business expense, just like if you owned a separate rental property. The remaining 50% that you're claiming on Schedule A is treated as personal mortgage interest, and that's where the $750k limit applies. But here's the crucial part - the limit applies to the dollar amount of the mortgage principal allocated to personal use, not your total mortgage. So if your total mortgage is $1.4 million but you're only using 50% for personal residence ($700k), you're still under the $750k cap for personal use. That's why the tax software is letting you deduct the full $21,000 remaining after your rental allocation. Your approach sounds correct, but definitely make sure you have solid documentation for your 50% allocation method. Square footage measurements are your best friend if you ever get audited!

Just wanted to add another perspective on the documentation side - I've been through an IRS audit for my rental property allocation and here's what really helped me: Keep a simple spreadsheet showing your allocation calculation. I documented the total square footage of my home (2,400 sq ft), the rental bedroom (180 sq ft), plus the proportional share of common areas my tenant uses. For common areas, I calculated that my tenant has access to about 60% of the kitchen, 40% of the living room, and 50% of one bathroom, which added up to about 320 sq ft of shared space. Total rental allocation: 180 + 320 = 500 sq ft out of 2,400 sq ft = 20.8% (I rounded to 21% for simplicity). The auditor appreciated that I had photos from when I first set up the rental, showing exactly which areas the tenant could access. I also kept receipts for any expenses that were 100% rental (like a separate mailbox for the tenant) versus the ones I allocated based on my percentage. One thing that caught me off guard - the auditor asked about utility usage patterns. I didn't have separate meters, but I was able to show that I allocated utilities the same way as everything else (21%), and explained that the tenant's bedroom had its own thermostat zone, which supported my allocation method. The key is being able to tell a consistent, logical story about how you determined your percentages. As long as your method is reasonable and you apply it consistently across all expenses, you should be fine!

Has anyone else noticed that United States Oil Fund ALWAYS sends their K-1s super late? I've gotten them in May before! I started using the "extension trick" - I just automatically file an extension every year now even if I have all my other docs, because I know these partnership K-1s will come late. Gives me until October 15 to file without rushing.

I went through this exact same situation with a United States Oil Fund K-1 two years ago! The most important thing is not to panic - this is incredibly common and the IRS is well aware that these partnership K-1s arrive late. Here's what I learned: even though your K-1 shows no gain/loss, you still need to file an amended return because the cost basis information needs to be properly reported. The difference between your 1099-B ($14.50 profit) and your K-1 (showing cost basis only) is normal - they're reporting different aspects of the same investment. When I amended mine, I had to use Schedule E to report the K-1 information and Form 8949 to adjust my capital gains reporting. The good news is that if there's truly no income on the K-1 (check all the boxes, especially 1-3 and 11), your actual tax liability probably won't change much. Don't worry about penalties - the IRS gives reasonable cause exceptions for late K-1s since partnerships routinely miss the deadline. Just file your 1040-X within a reasonable time after receiving the K-1 and you'll be fine. I filed mine in June that year with no issues whatsoever.

Don't forget to check if you need to file an amended state return too! Depends on your state, but most require it if you amend your federal.

I was in almost the exact same situation last year - forgot about a W-2 from a part-time retail job and didn't realize until weeks after filing. The anxiety was real! But honestly, it's way more common than you think and totally fixable. Here's what I learned from going through it: File the 1040-X as soon as possible, but don't stress too much about the timeline. Since you caught it yourself before the IRS did, you're already ahead of the game. The additional tax on $3,800 probably won't be as scary as you think - mine was around $600 for similar income. One tip that saved me some headache: when you calculate what you owe, factor in any federal withholding that was on that forgotten W-2. A lot of people forget that part and think they owe more than they actually do. The withholding reduces what you'll need to pay with your amendment. You're doing the right thing by fixing it proactively. The IRS appreciates voluntary corrections way more than having to chase you down later!

I really appreciate everyone sharing their experiences with phantom income situations - this thread has been incredibly helpful! Based on what I'm reading here, it sounds like I don't need to panic about the reasonable compensation issue since my S Corp is just a passive investor in this partnership. I'm definitely going to start documenting everything better. The certified mail approach that Emma and Luca described makes a lot of sense for creating that paper trail. I've been sending emails to the managing partner asking for financials, but they just ignore them completely. Time to get more formal with certified letters referencing our operating agreement. One follow-up question though - should I be concerned about the IRS questioning why my S Corp owns this partnership interest instead of me personally? I set it up this way years ago for liability protection, but now I'm wondering if it creates more tax complications than it's worth. The phantom income problem might not even exist if I owned the partnership interest directly, right?

I'm dealing with a very similar phantom income situation with my S Corp that owns a small stake in a family real estate partnership. What's been most frustrating is the unpredictability - some years we get modest distributions that at least cover part of the tax bill, other years it's pure phantom income with zero cash flow. One thing that helped me was setting up a separate savings account specifically for these phantom income tax liabilities. Even in years when we do get some distributions, I immediately set aside a portion for taxes rather than treating it as available cash. It doesn't solve the fundamental problem, but it at least prevents the cash crunch when tax time comes around. Also, regarding the reasonable compensation question - my CPA explained it this way: if you're not actively working to generate that partnership income (like managing properties, finding deals, etc.), then it's investment income flowing through your S Corp rather than compensation for services. The IRS cares about employment tax avoidance on your actual labor, not on passive investment returns. Just make sure you can clearly demonstrate that you're not providing services to earn that partnership income.

After reading through this incredibly detailed discussion, I'm both impressed by the complexity and somewhat overwhelmed by all the considerations involved in SCIN premium calculations. As someone who works in tax compliance but hasn't dealt with SCINs specifically, I'm struck by how many moving pieces there are - mortality tables, Section 7520 rates, health evaluations, business valuations, payment structure considerations, and extensive documentation requirements. The Davidson case example really drives home how high the stakes are if you get this wrong. A few questions for the group based on what I've read: 1) For someone in their early 60s like the original poster, what's typically the "sweet spot" for note terms? It seems like longer terms increase mortality risk (requiring higher premiums), but shorter terms might not provide enough estate planning benefit to justify the complexity. 2) Has anyone here ever had to defend a SCIN during an IRS audit? I'm curious about the actual examination process and what specific documentation the IRS focused on most heavily. 3) Given all the professional fees mentioned (attorneys, actuaries, appraisers), what's the minimum estate size where SCINs typically make economic sense? I'm wondering if there's a practical threshold below which the costs outweigh the benefits. This has been an incredibly educational thread - thank you all for sharing your real-world experiences with such a complex estate planning tool.

As a tax professional who's worked with several SCIN implementations, I want to address some of the excellent questions raised by @Morgan Washington and @NightOwl42. Regarding note terms for someone in their early 60s: The "sweet spot" typically falls between 10-15 years. Shorter terms (5-7 years) often don't provide sufficient estate planning benefits to justify the complexity, while longer terms (20+ years) can require premiums so high they make the transaction uneconomical. At age 62, a 12-year term often provides a good balance between meaningful wealth transfer potential and manageable premium requirements. On minimum estate thresholds: In my experience, SCINs generally don't make economic sense for estates under $5-7 million. The professional fees, ongoing complexity, and opportunity costs need to be weighed against simpler alternatives like annual gifting or basic trusts. For larger estates ($10M+), the potential estate tax savings often justify the complexity and costs involved. One additional consideration I haven't seen mentioned: the impact of the 2025 estate tax exemption sunset. With exemptions potentially dropping significantly in 2026, there's been increased interest in SCINs as wealth transfer vehicles, but this also means more IRS scrutiny is likely coming. For those moving forward with SCINs, I strongly recommend stress-testing your premium calculations under different interest rate and health scenarios to ensure the structure remains viable even if circumstances change.