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.

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?

Are there any free alternatives to MileIQ? I'm trying to keep expenses down while starting my business.

Stride is a good free alternative that many of my clients use. It doesn't have all the premium features of MileIQ, but it covers the basics the IRS requires. Some people just use Google Maps to calculate distances and keep a simple spreadsheet with dates and purposes. That works too as long as you're consistent and record everything promptly.

Wait what?? I've been filing self-employed for 3 years and never heard of this. Is this something new?

My accountant mentioned this last year. It's not new, been around since 2018 but many self-employed people miss it. Definitely worth looking into if you're filing a 1099.

Do you withhold taxes from their paychecks or is there some exemption since they probably don't make enough to owe taxes anyway?

We do withhold federal income tax as normal, but they both typically get it all refunded when they file their returns since they earn under the standard deduction. For FICA taxes (Social Security and Medicare), there's an exemption for children under 18 working in a parent's business if it's a sole proprietorship or a partnership owned only by the parents. Since our restaurant is set up that way, we don't have to withhold FICA taxes from their wages, which saves everyone money. If your business is incorporated, different rules apply and you would need to withhold FICA.

There's no minimum age requirement in federal law for working in a parent's business (though state laws may vary). But what matters is whether the work and pay are reasonable. A 9-year-old stuffing envelopes occasionally should be paid what you'd pay any kid that age for that task - not an adult wage.