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Capital gains and depreciation recapture question for rental property that became my primary residence again
So I've been trying to figure out this complicated tax situation with my house. I bought my house about 6 years ago and lived in it for 3 years as my primary home. Then I got a job offer in another city that was too good to pass up, so I ended up renting out my house for the past 3 years while I was away. Now I'm planning to move back into my house for 2 more years, and then sell it. Originally I thought I could just claim the full capital gains exclusion ($250k for single filers) after living in it again for 2 years. But after some research, I'm not so sure anymore. From what I'm finding, it seems like I can only exclude the prorated time I actually lived in the house compared to the total ownership time? So if I own it for 8 years total (3 years living + 3 years renting + 2 years living again), would my capital gains exclusion be limited to 5/8 of the gain since I only lived in it for 5 of those 8 years? Also really confused about depreciation recapture. During those 3 rental years, I've been claiming about $8,000 in depreciation annually, so around $24,000 total. Does that mean when I sell, I'll have to recapture all $24,000 as ordinary income? Or is that also prorated somehow because I'm converting it back to a primary residence? Any help understanding these capital gains exclusions and depreciation recapture rules would be super appreciated!
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Filed our business taxes under LLC instead of S corp - overpaid significantly
So frustrated right now. We just discovered our previous tax preparer has been filing our business taxes as an LLC when we should have been an S corp the whole time. This has resulted in us paying a ridiculous amount of extra taxes plus penalties on top of that. We elected for S corp status years ago but somehow this tax preparer completely missed that and kept filing us as a single-member LLC. Now we're looking at several years of overpayments and I'm wondering what our options are. What's the simplest way to correct this situation? Can I handle this myself by filing amended returns, or is this complicated enough that I need to hire a professional to sort it all out? The thought of paying even more money to fix someone else's mistake is killing me. Appreciate any guidance from those who've dealt with this before.
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A quick tip that helped me with a similar issue - request your "Account Transcripts" directly from the IRS before filing any amendments. These will show how your business is classified in their system. You can get these online through the IRS website by creating an account at https://www.irs.gov/payments/view-your-tax-account. The transcript will show if you're on record as an S-corp or LLC, which helps confirm whether your election was properly processed. This saved me a ton of headache because I could prove to my new accountant that the S-corp election was in the IRS system even though my old preparer had been filing incorrectly.
Does anyone know if the transcripts also show if you've been assessed penalties for filing under the wrong business type? Or would those just appear as general penalties without specifying the reason?
The account transcripts generally don't specify the exact reason for penalties, they just show the penalty amount, code, and date assessed. However, you would see if there were any penalties at all, which might help you understand the full financial impact of the incorrect filings. If you need to know specifically why a penalty was assessed, you would need to request a call with the IRS (Claimyr mentioned above can help with this) or request a detailed explanation of penalties in writing, which takes much longer to receive.
Quick warning based on personal experience - when you amend from LLC to S-corp returns, make sure your new preparer correctly handles any state tax implications too. I fixed my federal returns but completely overlooked that my state returns also needed to be amended to match the corrected filing status. Ended up with a mess at the state level when they couldn't reconcile my federal and state filings. Some states also have different rules for S-corps vs LLCs, so you might have overpaid state taxes too that could be refundable.
Deceased Relative's Unpaid Tax Debt: Handling Liens and Getting IRS Transcripts
I'm currently serving as the executor for a family member's estate who passed away in 2022. Without going into all the details, the estate administration has been seriously delayed. Here's what I'm dealing with: My relative suffered from progressive dementia and hadn't filed any tax returns from 2013 until their death. We have very spotty financial records and I'm completely in the dark about what the IRS believes is owed. The IRS has been sending collection notices for unpaid taxes from 2013 and 2014, and they've now placed liens on the deceased's house, which is the main asset in the estate. I live in a completely different state about 1,300 miles from where my relative lived. Someone suggested I should request "tax transcripts" for the years 2013-2022 to figure out the outstanding tax debt. I checked the IRS website which mentions transcripts contain information from returns, but doesn't clarify if they show what the IRS thinks is owed. I believe I need to submit forms to: 1) formally establish myself as the executor, 2) change the mailing address from my relative's house to mine so I receive communications faster, and 3) request those transcripts. The problem is there seem to be multiple forms for these purposes and the website is confusing me. I tried calling the IRS but hit nothing but automated systems asking for my own SSN, which doesn't help since I'm trying to handle someone else's tax situation. It seems impossible to reach an actual human being for guidance. The closest IRS assistance office is about 150 miles from me, making an in-person visit impractical. I'm thinking I might need to hire a tax professional, but I'm not sure if I should find someone local to me or someone in my deceased relative's state (where I can't easily travel for meetings). I'm completely overwhelmed and getting more stressed by the day. Any advice would be greatly appreciated.
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Based on my experience settling my cousin's estate, you absolutely need a tax professional who specializes in estates with tax problems. I'd recommend looking for an Enrolled Agent rather than a CPA - they often charge less but have specific expertise in dealing with the IRS. You should find someone in the deceased's state since they'll be familiar with both the state tax laws and potentially have relationships with the local IRS office. Most work can be done remotely, but having someone who understands the local requirements is invaluable. One thing nobody mentioned - if the estate doesn't have enough liquid assets to pay the tax debt, you might qualify for an Offer in Compromise specifically for estates. An EA can help determine if that's feasible given your situation.
Thanks for this advice. I've been looking at professionals online, but wasn't sure about the CPA vs EA distinction. Do you know if there's a national directory specifically for EAs who specialize in estate tax issues?
The National Association of Enrolled Agents (NAEA) has a directory on their website where you can search by specialty, including estate and trust taxation. Just go to the NAEA website and look for their "Find an EA" feature. I'd also recommend calling a few estate attorneys in the deceased's city - they typically work closely with tax specialists who handle complex estate matters and can make solid recommendations. When you talk to potential EAs, specifically ask about their experience with unfiled returns and IRS collections for deceased taxpayers, as this is a specialized area.
One warning from my own experience - do NOT file any tax returns yet until you get the transcripts and understand what the IRS already has on record! I made this mistake with my father's estate and created a huge mess. Get Form 56 filed first to establish your authority, then get the account transcripts which will show assessments and balances. Also request the wage and income transcripts which show all income reported to the IRS on forms like W-2, 1099, etc. If the IRS has already made assessments (called Substitute for Returns), filing returns without understanding what they've already processed can create duplicate assessments or conflicting information that takes forever to resolve. You mentioned liens - check the exact type of lien. If it's a "Notice of Federal Tax Lien," that's public and affects property sales. If it's just a "Notice of Intent to Lien," you might still have time to request a Collection Due Process hearing.
What's the difference between account transcripts and wage/income transcripts? Aren't they the same thing?
What the heck does estimated tax credits mean on my state letter?
So I just got this letter from my state tax department (not the IRS) and I'm super confused. It's asking about "estimated tax credits" but I have no clue what they're talking about. I made my quarterly estimated tax payments throughout the year like I always do since I'm self-employed. Is that what they're referring to? Why would they call my payments "credits"? The letter doesn't explain anything clearly and just says I need to provide documentation for estimated tax credits. I'm wondering if this is just some weird phrasing for the quarterly estimated payments I already made or if this is something completely different I should know about. Anyone deal with something similar before? I'm in Maryland if that helps.
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I went through this exact thing! What state are you in? In my case (NC), they wanted proof that I had made my quarterly payments because their system showed I claimed credit for them on my return but they had no record of receiving them. Turns out my accountant had mistyped my SSN on ONE of the quarterly payment vouchers so it got credited to someone else's account!
I'm in Maryland. And wow, that's exactly what I'm worried about! I do my own taxes with software but I'm not the most organized person. Did you have to provide actual payment records or did they eventually find the payment with the wrong SSN?
They eventually found the payment under the incorrect SSN, but it took about 3 weeks and I had to provide
This might sound silly but are you sure it's a legitimate letter? Scammers are getting more sophisticated with tax-related cons. Check the phone number on the letter against the official state tax department number on their website (not the one in the letter). My brother got a very official looking "state tax" letter that turned out to be completely fake.
THIS!!! I almost fell for something similar. The letter had all the right logos and everything. Called the actual department and they confirmed they hadn't sent anything. Scary how good these scams are getting.
That's a good point! I checked and it does seem legitimate - has all the official letterhead and the return address matches what's on their official website. I also logged into my state tax account and there's a notice there too mentioning documentation needed. But thanks for the warning - probably saved someone else from falling for a scam!
How to Effectively Challenge the IRS About Marketplace Healthcare Credits?
Ugh, I've spent the last three months in an absolute nightmare with the IRS over our healthcare premium tax credits from 2024! My husband and I purchased our insurance through Healthcare.gov (the federal marketplace since our state doesn't have its own exchange), and now the IRS is claiming they "can't verify" that we actually bought through the exchange. We got a letter (CP11) stating they're disallowing about $3700 in premium tax credits, turning our expected $2200 refund into a $1400 bill! I immediately sent in our 1095-A form, but a few weeks later we got this massive 4800C letter saying they still couldn't verify our marketplace coverage and we still owe the money. I've called the IRS at least 8 times now. Each time I wait on hold for 2+ hours just to speak to someone who gives me different answers about what documentation to send. One agent says send premium statements, another says send eligibility letters, and NONE of them can confirm if they even received the documents I already sent! I've sent everything I could find - 1095-A forms, eligibility letters from the marketplace, screenshots of my Healthcare.gov account showing the payments, confirmation emails - basically an entire folder of proof. But I just got ANOTHER letter saying they're still disallowing the credits. Has anyone successfully fought the IRS on premium tax credits? What documentation actually worked? I'm going crazy with this and don't know what to do next!
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One thing nobody's mentioned yet is contacting your Congressional representative's office. I had a nightmare situation with the IRS last year that dragged on for 8 months with no resolution despite sending in documentation multiple times. I finally contacted my Congressman's office and explained the situation. They have staff specifically dedicated to helping constituents with federal agency issues. I filled out a privacy release form, and within THREE WEEKS, the IRS had processed my documentation and resolved the issue. Congressional offices have special channels to IRS Taxpayer Advocate offices that can cut through red tape. Don't underestimate how effective this approach can be when you've tried everything else!
That's a great suggestion I hadn't thought of! Did you just call your representative's local office? Was there a specific person or department you asked for? I'm willing to try anything at this point.
Yes, I called my rep's local district office (not their DC office). Just ask to speak with the caseworker who handles IRS issues. Every congressional office has staff dedicated to constituent services. They'll email you a privacy release form that you need to sign and return, which gives them permission to inquire about your case. Make sure you provide them with copies of all the correspondence you've had with the IRS so far, including your notice numbers and any reference numbers. The magic happens because congressional inquiries go to a special unit at the IRS that is much more responsive than regular channels. They have to provide updates to congressional offices, so things suddenly start moving much faster.
Has anyone tried using the IRS's online account features to resolve these types of issues? I set up an online account on IRS.gov recently and was shocked to find I could see all my notices, tax records, and even upload documents directly through the portal rather than mailing them. I'm wondering if uploading documents this way is more reliable than sending them through the mail where they seem to get lost in the void.
I've used the online account system and while it's good for viewing your tax records and making payments, I found the document upload feature to be hit or miss. I uploaded documentation for an issue similar to OP's, and there was no confirmation that anyone had reviewed it or that it was attached to my case. I ended up having to mail in physical copies anyway after calling and finding out the uploaded documents weren't associated with my specific case/notice. The system needs a lot of improvement.
Thanks for sharing your experience. That's disappointing to hear. I was hoping the online system would be more efficient, but sounds like it has the same problems as mailing documents. Did you at least get some kind of upload confirmation when you submitted the documents, or was it completely unclear if they were received at all?
Darren Brooks
Another option to consider is a 1031 exchange if you want to invest in another rental property instead of taking the capital gains hit. You can defer all the capital gains, though you'd still have to pay the depreciation recapture. I did this with a property last year - sold my rental and rolled all proceeds into a new investment property. The key is you need to identify the replacement property within 45 days and close within 180 days. And you need to use a qualified intermediary to hold the funds between sales.
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Darcy Moore
AuthorThanks for mentioning the 1031 exchange option. I had considered that briefly but wasn't sure if it would work in my situation since I'm planning to move back into the property first. Would moving back in disqualify it from a 1031 exchange later? Or would I need to keep it as a rental the whole time?
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Darren Brooks
Yes, moving back in would complicate things for a 1031 exchange. For a property to qualify for a 1031 exchange, it needs to be held for productive use in a trade or business or for investment purposes at the time of the exchange. If you convert it back to your primary residence, it no longer qualifies as investment property. So if you want to do a 1031 exchange, you'd need to sell it while it's still a rental property. Once you move back in, that option is effectively off the table.
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Rosie Harper
One thing nobody's mentioned yet - if you claimed any rental losses during those 3 years when it was a rental property, check if any of those were suspended passive losses. When you sell the property, you can use those suspended losses to offset some of the gain or recaptured depreciation. This caught me by surprise when I sold my rental last year - had about $8k in suspended passive losses from years where my income was too high to claim the rental losses, and my accountant was able to apply those against my depreciation recapture amount.
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Elliott luviBorBatman
This is super helpful! I have a similar situation and have suspended passive losses from rental properties. Does that get reported on the same tax form when you sell? Is there anything special you need to document?
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