9 months?! That's insane. Does that mean I won't get the additional refund (if there is one) for that long? Or would I likely owe more since a W2 was missing?

It really depends on what was on that missing W2. If there was a lot of withholding on it, you might be owed an additional refund. If there wasn't much withholding compared to the income, you'll probably owe more tax. And yes, unfortunately the wait times are crazy long now. If you're owed money, you'll have to wait until they process the amendment to get it. If you owe more, you should pay it when you file the amendment to minimize interest and penalties, even though they'll take forever to actually process the paperwork.

This is such important advice. My brother went through a messy divorce and tax issues made everything 10x worse. Document everything and maybe even consider getting something in writing about how additional tax bills or refunds will be handled.

Thank you for this simple breakdown! I think I can work with this approach. Do I need to adjust for any improvements we made to the house over the years? We did a kitchen remodel about 12 years ago and added a bathroom around the same time.

Yes, major improvements should definitely be factored in. For the kitchen remodel and bathroom addition, you would take the cost of those improvements, multiply by your business use percentage, and then depreciate that amount over 27.5 years starting from the year the improvements were completed. You'll want to add this additional depreciation to your original calculation. If your home office included any portion of these improved areas, that would increase your annual depreciation from the point those improvements were made. It makes the calculation a bit more complex, but still very doable even without all your old returns.

Yes there definitely can be. The IRS requires you to recapture ALL depreciation that was "allowed or allowable" - meaning even if you didn't claim it but could have, you still have to recapture it. If you underreport, you could face accuracy-related penalties plus interest on the underpaid taxes.

Thanks for bringing this up! I checked my lease and surprisingly, subletting is allowed with landlord approval. My city also allows short-term rentals with proper registration. This is super helpful though - I wouldn't have thought about checking local regulations beyond just my lease.

Wait, aren't you technically running a business though? Could you have classified it as self-employment instead of rental activity? Then maybe the losses would apply differently?

I asked my accountant about that too! She said it depends on the level of services provided. If you're just providing basic rental amenities (bed, bathroom, etc.), it's still rental activity. If you're providing substantial services like daily cleaning, meals, concierge services, etc. - more like a B&B - then it might qualify as a business rather than rental activity. In my case, I wasn't providing those "substantial services" so it still counted as rental activity with all the passive loss limitations.

Wait, so if the buyer put down more than 30%, I can't use installment sale reporting? My buyer put down 25% so I'm close to that threshold. Can you explain more about how this works?

There's no hard 30% rule that disqualifies you from installment sale treatment. I should have been clearer - I was thinking of the old "substantial payment" rules that aren't relevant anymore. You can use installment sale reporting regardless of the down payment amount. However, a large down payment will result in more taxable gain in the first year. If you received 25% down, then approximately 25% of your total gain would be taxable in the year of sale (assuming your gross profit percentage applies evenly).

My tax software doesn't seem to separate this stuff automatically. Will it prompt me for the breakdown between principal and interest, or do I have to figure that out myself?

Thanks for this info. Did your accountant have you include any specific documentation with your tax return or did you just keep the receipts in case of an audit? And did you have to explain the circumstances anywhere on the actual return?

I just kept all receipts and the agreement with the homeowner in my files - didn't submit them with the return. My accountant did add a brief note in the description field for the "other business expenses" line that said "work-related injury medical costs" but nothing detailed. If you use tax software, there's usually a field for descriptions where you can briefly note what the expense was for. The key is having your documentation organized and ready if they ever ask about it. I keep a dedicated folder for each tax year with all my receipts and any unusual expense documentation.

This is good advice. I learned this the hard way too. Got a proper occupational policy after paying out of pocket for a back injury. The monthly premium is tax deductible too!