I've been following this discussion and want to add one more important consideration that hasn't been fully addressed - the potential for estimated tax payments if you go the Schedule C route. Since Schedule C income is subject to self-employment tax, and you made $31,000 on your half of the flip, you might owe quarterly estimated taxes if this pushes your total tax liability significantly higher than what was withheld from your regular job. The IRS generally expects you to pay taxes as you earn income throughout the year. This is especially important if you're planning to do more flips in the future. Even though this was a "one-time" flip, many people get bitten by the real estate bug after a successful first project. If that happens, you'll definitely want to be set up properly with estimated payments from the start. Also, don't forget that if you do use Schedule C, you may be eligible for the Section 199A QBI (Qualified Business Income) deduction, which could give you up to a 20% deduction on your business income. This deduction can significantly offset some of the self-employment tax burden, especially if your total household income is under the phase-out thresholds. Given all the factors discussed here - your active involvement, consistency with your dad's treatment, and the additional deductions available - Schedule C seems like the right call for your situation.

As a tax professional who's dealt with numerous house flipping cases, I want to emphasize that the IRS's determination really comes down to the "facts and circumstances" test. Your situation - 5 months of active weekend and evening work, hands-on renovation involvement, and partnership with someone treating it as a business - strongly suggests Schedule C treatment is appropriate. One key factor people often overlook is the "holding period" aspect. Properties held primarily for sale to customers (which is what flipping typically involves) are considered inventory, not capital assets. This automatically pushes toward ordinary income treatment on Schedule C rather than capital gains on Schedule D. Your wife's concern about it being "one-time" is understandable, but the IRS looks at the nature of the activity, not frequency. Even a single transaction can constitute a trade or business if there's sufficient activity and profit motive. The Tax Court has consistently held that extensive renovation work and active management constitute business activities. Given that your father's CPA already filed Schedule C for his portion, filing differently for the same project partnership could create audit risk due to inconsistency. I'd recommend going with Schedule C, ensuring you document all legitimate business expenses, and setting aside funds for the self-employment tax. The additional expense deductions available on Schedule C often help offset the SE tax burden, especially with proper planning.

This is exactly the kind of discussion I needed to see as someone just starting my small business! I've been going back and forth on whether to order some branded items for my marketing agency, and everyone's real experiences here are so much more valuable than the vague advice I kept finding online. The distinction between promotional giveaways and clothing is really clear now - stick to items like pens, mugs, and notepads that are obviously promotional, and avoid clothing unless it's truly specialized work gear that couldn't be worn casually. The audit stories were especially eye-opening about how important documentation is. I'm definitely implementing the photography approach before distributing items, and I love the idea of having a written promotional items policy to keep decisions consistent throughout the year. The separate business credit card suggestion is brilliant too - I'm setting that up this week. One thing I'm still wondering about - for digital promotional items (like branded USB drives or phone accessories), do these follow the same rules as traditional promotional items? I was thinking of getting some branded portable phone chargers to give out at networking events, but they're a bit pricier than pens or mugs. Anyone have experience with tech promotional items?

This entire discussion has been incredibly helpful! As someone who's been running a small graphic design business for about 6 months, I was really uncertain about what promotional items I could safely deduct. The consensus seems clear: stick to obvious promotional items like pens, mugs, and keychains rather than clothing, keep detailed documentation with photos and distribution logs, and organize everything well from the start. The real audit experiences shared here are particularly valuable - it's reassuring to know that well-documented promotional giveaways generally aren't questioned by the IRS. I'm taking notes on all the practical tips shared: separate business credit card for promotional purchases, photographing items before distribution, creating a written policy for consistency, and using smartphone apps to log distributions in real-time. These systems seem much easier to implement from the beginning than trying to recreate documentation later. For my design business, I'm planning to start with branded notebooks and pens for client meetings, plus some nicer items like branded mouse pads for my best clients (staying under that $25 gift limit). The tech promotional items discussion was especially relevant since I was considering branded USB drives for portfolio presentations. Thanks to everyone who shared their real experiences instead of just speculation - this community is incredibly helpful for new business owners trying to navigate these tax questions!

I'm facing this exact situation right now with my leased Tesla Model 3 that has about $8,000 in positive equity. Reading through all these responses has been incredibly helpful, but I'm still nervous about potentially making the wrong decision. What strikes me most is how consistent the advice seems to be across multiple tax professionals - that since we never held title to the leased vehicle, there's no taxable sale and therefore no capital gain to report. The explanation that the positive equity is essentially a discount/rebate on the new vehicle purchase makes the most sense to me. I'm leaning toward following the same approach everyone here has described (not reporting it as income), but I think I'll also document everything thoroughly just in case. I'll keep copies of the lease agreement, trade-in paperwork, and purchase contract for the new vehicle to clearly show the transaction flow. Has anyone here ever had their tax return questioned by the IRS regarding this type of situation, even years later? I'm just trying to gauge if this is something that might come up in a future audit.

I appreciate everyone sharing their experiences with this situation. As someone who works in tax compliance, I wanted to add a few practical considerations that might help others facing similar lease trade-in scenarios. First, the consensus here is correct - most tax professionals treat positive equity from lease trade-ins as non-taxable events since you never held title to the vehicle. However, I'd recommend a couple of additional steps for anyone in this situation: 1. **Get it in writing**: If you consult a tax professional about your specific situation, ask for their advice in writing (email is fine). This creates a record that you sought professional guidance and relied on it in good faith. 2. **Consider the amounts involved**: While the tax treatment should be the same regardless of the equity amount, larger amounts (like the $8,000 mentioned by AstroAdventurer) might warrant extra documentation or a second opinion from a tax professional. 3. **Keep transaction records organized**: In addition to the lease agreement and trade-in paperwork, keep the settlement statement from your new vehicle purchase showing exactly how the equity was applied. This makes it crystal clear that you never received cash proceeds. The risk of IRS scrutiny on this issue seems very low given how common these transactions have become with current used car values, but having proper documentation gives you confidence in your position.

I'm so sorry for your loss, Jasmine. Having gone through a similar situation with my grandmother's non-qualified annuity two years ago, I completely understand how overwhelming this can feel during an already difficult time. From your description, you're looking at taxable income of about $77,500 ($109,500 - $32,000 basis). The key thing to understand is that this will be taxed as ordinary income, not capital gains, so your marginal tax rate will apply to the full gain amount. Given that you're 34 with a stable government job earning what sounds like a moderate income, the stretch payments over 5 years will almost certainly be your best option. Taking the full amount in one year could easily bump you into the 22% or even 24% tax bracket, whereas spreading it out should help keep you in a lower bracket overall. A few things that helped me navigate this: - The annuity company should provide projections showing different distribution schedules - You can typically adjust the amounts each year (bigger in some years, smaller in others) as long as everything is withdrawn by the 5-year deadline - Consider coordinating with your 457b contributions - you could increase those in years when you take larger distributions to help offset the tax impact Before you decide anything, definitely get a consultation with a fee-only financial advisor who can run the actual numbers for your specific tax situation. Given the amount involved, spending $300-500 on professional advice could save you thousands in taxes. Take your time with this decision - you have the 5-year window, so there's no need to rush into anything while you're still processing your loss.

I'm so sorry for your loss, Jasmine. Dealing with financial decisions while grieving is incredibly challenging, and I want to commend you for being so thoughtful about this important decision. Based on what you've shared, you're absolutely right to be considering the stretch payments over the lump sum. With a taxable gain of about $77,500, taking it all at once could significantly impact your tax bracket, especially given your current government salary and existing retirement contributions. One thing I haven't seen mentioned yet is the importance of timing your first distribution. Since you inherited this in 2025, you have until December 31, 2029 to complete all withdrawals under the 5-year rule. This means you could potentially delay your first distribution until 2026 if that would be more advantageous for your tax situation. Also, as a government employee, you might have access to additional pre-tax savings vehicles beyond your 457b - like a traditional IRA if you're not already maxing one out, or potentially a Health Savings Account if you have a high-deductible health plan. These could help offset some of the tax impact in years when you take larger distributions. I'd strongly recommend getting professional guidance before making your final decision, but based on the experiences shared here and your described situation, the stretch approach seems like it would serve you well. Take the time you need - both to process your loss and to make the best financial decision for your future.

One more important consideration that hasn't been mentioned - make sure you and your brother-in-law are on the same page about tax elections before you finalize everything. When you convert to a partnership, you'll have options for how profits and losses are allocated that go beyond just your ownership percentages. For example, you might want to allocate more of the depreciation deductions to the partner in a higher tax bracket, or structure guaranteed payments for the managing partner. Also, consider whether you want to make a Section 754 election, which can be beneficial for basis adjustments when partners join or leave. It's easier to make this election early rather than trying to add it later. I'd strongly recommend having a tax professional review your partnership agreement before you sign it. The 60/40 split sounds straightforward, but there are a lot of nuances in partnership taxation that can bite you if not handled properly from the start.

This thread has been incredibly helpful! I'm going through a similar conversion process right now and wanted to add a few things I've learned from my attorney and CPA that might help others: 1. **Timing matters for tax purposes** - If you're converting mid-year, you'll need to decide whether to make the partnership election effective from the beginning of the tax year or from the date the new member joins. This affects how you'll file your taxes for that year. 2. **Capital account tracking** - Make sure your operating agreement includes proper capital account provisions. The IRS requires partnerships to maintain capital accounts for each partner, and these need to follow specific rules to avoid complications. 3. **State franchise taxes** - Some states charge different franchise taxes for partnerships vs. single-member LLCs. In my state (Texas), multi-member LLCs are subject to franchise tax while single-member LLCs are not. 4. **Employment tax considerations** - If you were previously treating yourself as a sole proprietor for self-employment tax purposes, this changes significantly when you become a partnership. Partners generally aren't employees, so you'll still pay self-employment tax on your distributive share, but the mechanics are different. The conversion process has definitely been more complex than I initially thought, but having the right professional guidance has made it much smoother. Thanks everyone for sharing your experiences!