That's really interesting, I hadn't come across Section 195 in my research. How would I "demonstrate" that I was still in startup phase? Would the fact that I only had one short-term guest who was a friend be evidence of that? And how does this interact with the depreciation requirements that seem to start once I had that first paying guest?

To demonstrate you were in startup phase, you would need to show that you were preparing to enter the rental business but not yet actively operating. Documentation is key here - keeping records of renovation work, marketing efforts in progress, business plan development, etc. The fact that you only had one friend stay for a fee that was likely below market rate could potentially support your position that this wasn't the start of regular operations. Regarding depreciation, there's an important distinction here. Section 195 applies to business startup costs (like market research, analysis, business formation costs, etc.), while depreciable assets like furniture and appliances follow different rules. Those depreciable assets would generally start being depreciated when placed in service, which would arguably be when your property was ready and available for rent - potentially when your friend stayed there. It's a complex area with some gray zones. The most conservative approach would be to start depreciation in 2024 for your assets while potentially treating certain qualifying expenses as Section 195 startup costs. This is definitely a situation where professional guidance specific to your circumstances would be valuable.

I went through an audit 3 years ago specifically about first-year rental losses. In my experience, the IRS was mainly looking at whether I had the "intent to profit" from the rental activity. They wanted documentation showing I was genuinely trying to rent it out at market rates and not just using it primarily as a personal residence with occasional rentals. They also scrutinized my depreciation start dates and whether I had properly segregated personal use vs. rental use time. As long as you have good documentation and weren't trying to claim personal expenses as rental expenses, you should be fine even with legitimate losses in the first year. Those startup costs and initial losses are normal in the rental business.

That's really helpful, thanks. I do have good documentation of all my expenses and definitely was trying to rent it out (have all my marketplace listings saved). I'm just nervous because the loss ratio is so high compared to income in that first year. Sounds like that might be normal and expected though if I can document everything properly.

Do you know if you can claim this refund if you're not required to file a US tax return otherwise? I'm in a similar situation (small dividend after moving) but don't have any other US income to report.

Yes, you can still claim a refund even if you're not otherwise required to file a US return. You would file Form 1040-NR specifically to claim the refund of overwithholding. For small amounts, you'll need to decide if it's worth the effort. The form isn't particularly complicated, but you'll need to include a copy of your 1042-S showing the withholding and explain that you're eligible for the lower treaty rate. Some people find it's not worth the hassle if the refund amount is very small.

This is a good point. Would the broker still provide an accurate cost basis on the 1099-B for those reinvested shares even if the account holder is now a non-resident alien?

This is actually good advice. I had selected paper check on my return but they sent direct deposit anyway using my bank info from the previous year. Worth checking both!

I just tried but couldn't create an account because they want me to verify identity with a credit card or loan number and I don't have either of those right now. Seems like there's no easy way to get info from the IRS unless you're already financially established. So frustrating!

Thank you for this detailed response. We've checked the letter more carefully and it does have a CP504 notice number on it, so I think it's legitimate. What's the difference between Currently Not Collectible status and an Offer in Compromise? Would either of these permanently resolve the debt or just delay collection?

Currently Not Collectible (CNC) status temporarily pauses collection actions when paying the tax debt would create an economic hardship. The debt doesn't go away, but the IRS stops trying to collect while you're in financial hardship. The IRS reviews your status periodically (usually annually) to see if your financial situation has improved. An Offer in Compromise (OIC) is a settlement agreement where the IRS accepts less than the full amount owed to resolve the debt permanently. You have to demonstrate that you cannot pay the full amount due to financial hardship, and they consider your income, expenses, asset equity, and ability to pay. If accepted, you fulfill the terms of the offer (usually a reduced lump sum or payment plan), and the debt is considered paid in full.

Innocent Spouse Relief only applies if the debt is from a joint tax return where one spouse didn't know about income that wasn't reported or incorrect deductions. From OP's post, it sounds like this is solely the wife's tax debt, not joint debt, so probably wouldn't apply here.

Thanks for clarifying! You're right - I missed that detail that it's solely in her name. In that case, exploring the hardship provisions others mentioned is probably the better route.

That's a really good point about state taxes that I hadn't considered. I'm in Texas which doesn't have state income tax, but we did live in California for two years during our marriage. Should I be concerned about that?

Yes, absolutely contact California's tax authority (Franchise Tax Board) immediately! California is extremely aggressive about collecting back taxes, and they have a lookback period of up to 20 years for tax fraud. If your ex didn't pay proper taxes while you lived there, California could come after you separately from the IRS. California does have an innocent spouse program, but you need to be proactive about it. Don't wait for them to find you. The good news is that if you get innocent spouse relief from the IRS, California generally follows the federal determination, but you still need to file the proper paperwork with them.

Adding to this excellent advice - be prepared for a long process. My innocent spouse case took 14 months to resolve completely. The IRS isn't known for speed. Make sure you respond to every letter they send within the timeframe they specify, and always send things certified mail so you have proof of delivery.