Thanks for bringing up the prorating - I converted in September, so that's really helpful. For the startup expenses, is there a limit to how much I can deduct in the first year? And what about the lawn mower and tools I bought specifically for maintaining the rental?

You can deduct up to $5,000 in startup expenses in your first year, with amounts above that amortized over 15 years. But these are specifically business startup costs like advertising, not equipment. For the lawn mower and tools, those are considered assets used for your rental activity. You can either depreciate them over their useful life (usually 5-7 years) OR you might qualify for Section 179 expensing or bonus depreciation to deduct them immediately. It depends on your specific situation and the total amount spent. Small tools under $200 each can generally be expensed immediately regardless.

You might qualify for the $25,000 special allowance for rental losses if your modified adjusted gross income is under $100,000 and you "actively participate" in rental management. This phases out entirely once your MAGI hits $150,000. If your income is higher, your losses are suspended until you either have passive income or sell the property.

I did keep copies of everything and sent it certified mail, so I have tracking confirmation they received it. Thank god for that tip! How exactly do I go about requesting this first-time penalty abatement? Is that something I can do now or do I need to wait for their response to my Schedule C submission?

You'll want to wait until you get their response to your Schedule C submission, as that will have the updated amount they believe you owe, including any penalties. Once you receive that, you can call the IRS (or use a service to get through) and specifically request "first-time penalty abatement" if you qualify. To qualify, you generally need to have had no penalties in the past 3 tax years and have filed all required returns and paid (or arranged to pay) any tax due. If approved, they'll remove the failure-to-file and failure-to-pay penalties, which can sometimes be a substantial portion of what you owe. Just be sure to specifically use the phrase "first-time penalty abatement" when requesting it, as some representatives won't offer it unless you ask.

This is key advice. When I got my CP2000 for some freelance work, I initially only claimed the obvious expenses. After doing more research, I realized I could legitimately claim partial use of my vehicle, a portion of my utilities since I worked from home, and even some travel expenses for meetings with clients. Cut my tax bill by more than half.

This is an excellent point. MFS status really complicates things with rental properties. I wonder if they should consider changing their filing status if the student loan situation allows for it?

That's a great tip, thank you! The flood damage definitely set us back, but we've been working on renovations specifically to get it ready to rent. Does documenting the renovation process count as proof of intent to rent?

Yes, documenting the renovation process is helpful, but it's not sufficient on its own. The IRS wants to see that you were actively trying to find tenants as soon as the property was habitable. Take pictures of the renovation with dates, keep all receipts and contractor communications that mention preparing for rental, but also start some rental-specific activities even before the property is 100% ready. For example, draft your rental listing, research comparable rents in your area and save those findings, contact insurance companies about landlord policies, and maybe even pre-screen a few potential tenants. Creating this paper trail of rental intent alongside your renovation documentation will give you much stronger proof if questioned.

Thanks for sharing your experience! Do you know at what point I would need to file Form 5500? I thought solo 401ks were exempt from that unless the assets exceed $250,000?

You're right that solo 401ks are exempt from Form 5500 filing requirements until your total plan assets exceed $250,000. Once you cross that threshold, you'll need to file Form 5500-EZ annually. Even if you're below that threshold now, it's still good practice to have your plan documentation consistent and organized from the beginning. Makes life much easier if/when you do eventually need to start filing, and prevents headaches if you ever get audited or need to roll the accounts over to a different provider.

This is an excellent point. When I set up my solo 401k with Schwab, I initially assumed I could make both traditional and Roth contributions, but it turned out their standard plan document didn't include the Roth option. Had to specifically request an amendment to add that feature.

Wait how do I even check this? I literally just signed up with my email years ago and never thought about it. Is there a specific setting I need to look for?

Go to your profile icon, then "Personal" at the bottom. If you see an option that says "Switch to Business" then you're currently on a personal account which is good. If it says something like "Business Settings" or shows a business name, then you have a business account. Cash App also has colors - personal accounts are usually green while business accounts are typically black. Double check this ASAP because it makes a huge difference in how your transactions are reported!

All the payment apps have to follow the same IRS rules now. Venmo, PayPal, Cash App - they all report when you hit $600 in goods/services. Switching platforms won't help unless you're making sure to use personal payment options.