Yes!! Cashapp was a disaster for my multi-state situation. I have rentals in Colorado but live in Texas. It kept trying to make me file resident returns in both states and the support was clueless. FreeTaxUSA correctly set up non-resident return for the rental state.

I had exactly the same experience! The software seemed to get confused between resident and non-resident state filing requirements. It kept prompting me to enter information that wasn't relevant to my situation. FreeTaxUSA immediately recognized that I needed a non-resident return for the state where my rental was located. The questionnaire was much more straightforward and accurately allocated income to the appropriate states. Their state filing support is definitely superior for rental property owners with multi-state situations.

FreeTaxUSA handles it pretty well. I sold a rental last year after owning it for 9 years and it walked me through calculating the recaptured depreciation at the 25% rate separate from the long-term capital gains. Just make sure you have good records of all the depreciation you've taken over the years!

Good point about the state tax! I didn't even think of that. How long would the state typically take to catch up after an IRS audit?

States usually find out within a year after the IRS audit is completed. The IRS and state tax authorities share information, though the timing varies by state. Some states automatically adjust your state tax when they receive info about federal changes, while others require you to file an amended state return within a specific timeframe (usually 30-90 days) after your federal adjustment. If I were you, I'd be proactive and check with your state tax department now. It's always better to address it early rather than let additional interest accumulate if you do owe more.

I'd just pay it. In my experience, amending old returns is a headache and often triggers more scrutiny. Plus you'd still owe the interest regardless.

This is exactly the kind of real-world experience I was hoping to learn from. Would you mind sharing what documentation the IRS specifically questioned during your audit? And did you qualify as a real estate professional or were you trying a different approach?

The documentation they zeroed in on was my activity log for proving real estate professional status. I claimed to meet the requirements but my records were inconsistent and some activities I counted weren't considered "material participation" by the auditor. I did qualify as a real estate professional based on hours, but they questioned whether I was truly spending more time on real estate than my primary job. They wanted to see detailed, contemporaneous records - not just a spreadsheet I created after the fact. They also scrutinized whether the rent I charged myself was truly market rate, asking for multiple comparable properties and professional rental assessments. One major issue was commingling of funds between personal and business accounts. They viewed this as evidence I wasn't treating the LLC as a separate entity. Make sure every expense goes through separate accounts and that you have a formal process for paying rent that looks like a true landlord-tenant relationship.

Good points. Also worth mentioning that mortgage rates for investment properties are typically higher than primary residences, often by 0.5-1%. So even if you find a lender willing to do this arrangement, you'll likely pay more for the mortgage, which could offset some of the tax savings.

That's a great idea, can't believe I didn't think of that! I was so focused on trying to figure it out myself that I forgot the source could just explain it. Do you think I should also ask them if this will affect my tax return calculation?

Absolutely ask them how it affects your tax return! That's the most important part. Bring specific questions like: "Does this amount need to be reported separately on my tax return?" and "Will this increase or decrease my taxable income?" A good payroll person should be able to tell you exactly where on your tax return this information belongs, if anywhere. Some items on tax forms are just informational and don't actually affect your filing.

TurboTax has similar features but charges extra for everything. I switched to FreeTaxUSA last year and saved a ton. They have good explanations too.

That's a great point I hadn't considered! We're in Texas, and I didn't even think about state-specific requirements. Do you know if most states have similar rules about fictitious business names?

Most states have some form of fictitious business name (DBA) requirements, but they vary significantly. In Texas, you'd file at the county level where your business operates. It's usually a simple form and modest fee ($25-50 typically). Texas doesn't have state income tax, but you may still need a sales tax permit depending on what you're selling. Even digital products can be subject to sales tax in Texas. Check the Texas Comptroller's website - they have specific guidance for partnerships using personal accounts.

I use Wave Accounting for my partnership (dog walking service with my roommate). It's free for the basic accounting features and lets you connect personal accounts but tag business transactions. You can set up multiple users so both partners can access it, which QuickBooks Self-Employed doesn't allow unless you pay for the higher tier. The reporting features make it easy to track partner distributions too.