Thanks for mentioning this! The letter does have a notice number (CP504) and there's info about appeal rights. I looked it up and CP504 is a "Final Notice of Intent to Levy" which is freaking me out even more. Does this mean they're about to take money from my accounts?

A CP504 is indeed a legitimate IRS notice and it's basically warning you that they may levy (seize) your assets or tax refunds if you don't address the debt. However, it's not actually the final notice before levy despite what the title suggests. Before they can actually levy your bank accounts or wages, they must send you a "Final Notice of Intent to Levy and Notice of Your Right to a Hearing" (Letter 1058 or LT11) and give you 30 days to request a Collection Due Process hearing. The CP504 is serious, but you still have time and options before any levies would occur. This would be a good time to contact the IRS to discuss resolution options like a payment plan or making a dispute if you believe the assessment is incorrect.

For the "Currently Not Collectible" status, what kind of documentation do they require? I've been unemployed for 9 months and there's no way I can pay my tax debt.

Thanks for the info! We haven't been taking depreciation deductions for that rental period, but I didn't realize we might still need to deal with "allowed or allowable" depreciation. The room was about 15% of the total square footage. Do you know if we need to do separate calculations for each ownership period (her alone vs. after marriage), or can we just do one calculation for the whole ownership period?

You'll need to handle the depreciation recapture for the portion that was rented (15% in your case) regardless of whether you took the deductions or not. The IRS considers depreciation to be "allowed or allowable" even if you didn't claim it. For your second question, you'll do one continuous calculation covering the entire ownership period. The fact that you got married during ownership doesn't create separate calculation periods. What matters is the total qualified use as a primary residence. You'll track the entire ownership timeline, identify the rental period for that 15% portion, and then calculate accordingly. The marriage itself doesn't reset or change the calculation method - it just potentially increases your exclusion amount from $250K to $500K if you both meet the use test.

Thanks! I'll give H&R Block a try. I've got all our documentation organized, including the substantial kitchen renovation we did that should increase our basis. Anything specific I should watch for when entering the info about the pre-marriage ownership period?

When entering the pre-marriage ownership period, make sure you correctly identify who owned the property during each timeframe. H&R Block will specifically ask about the ownership history. Be careful to enter the original purchase date and amount accurately for the spouse who owned it first. For your kitchen renovation, definitely include that as it increases your basis and reduces your capital gain. The software will prompt you to enter major improvements separately from the purchase price. Also, don't forget to include selling costs (like realtor commissions and closing costs) as they also reduce your taxable gain. The software does a good job walking you through all of this, just be methodical about following each step.

Oh that's interesting! He did do some weekend yard work for our neighbor and got paid about $300 cash throughout the summer. Does that count as self-employment? And would that change whether my parents can claim him?

The $300 from yard work would technically count as self-employment income, but since it's under the $400 threshold for self-employment tax, it doesn't trigger a required filing on its own. Your brother would add this to his total income though if he does file. This doesn't change your parents' ability to claim him as a dependent at all. The dependent qualification is based on age, relationship, residency, and support tests - not on whether the dependent files their own return or how much they made (within certain limits that your brother is well under).

This is so true! I wish someone had taught me about taxes when I was younger. I was completely lost when I had to file on my own for the first time in college.

Does it matter if the family member business is an S-Corp vs sole proprietor? My sister started paying me for IT work but her business is just a Schedule C.

The business structure does make some difference in how the transactions are reported, but the fundamental requirement that transactions be legitimate business activities at fair market value applies regardless of structure. With an S-Corp, there's typically more formal documentation and separation between the business and owner, which can help establish legitimacy. With a sole proprietor/Schedule C business, transactions between family members often receive more scrutiny because the line between business and personal is less formal.

This is the most sensible advice here. The standard mileage rate is so much simpler and the IRS rarely questions it as long as you have a mileage log. Taking huge vehicle depreciation for minimal business use is asking for trouble. The IRS isn't stupid.

So these improvements would increase my basis in the home and therefore reduce the calculated gain? I've done quite a bit to the house over the years - replaced all windows, completely renovated the kitchen, added a bathroom, and put in a new HVAC system. I didn't realize those would factor into the capital gains calculation.

Exactly right! All those improvements you mentioned increase your cost basis, which means less taxable gain when you sell. The formula is basically: Sale price - (Purchase price + Improvements + Selling costs) = Capital gain. Those renovations you mentioned are perfect examples of what qualifies. The new windows, kitchen renovation, additional bathroom, and HVAC replacement all increase your basis. Make sure you have documentation for these expenses if possible. Even if you don't have every receipt, estimates with supporting evidence (like before/after photos, contractor statements, etc.) can help if you're ever audited. This could potentially save you thousands in taxes!

The safe harbor rule usually applies to whether something qualifies as a repair vs. capital improvement, not to capital gains exclusions on home sales. I think you might be mixing up concepts?