Personal guarantees on business debt can indeed create "debt basis" for S-Corp shareholders, which is separate from stock basis. If you personally guaranteed any of that $67,500 in credit card debt, you would have debt basis equal to the amount you're personally at risk for. Here's how it works: Even with $0 stock basis, if you have debt basis from personal guarantees, you can still deduct S-Corp losses up to your total basis (stock basis plus debt basis). However, debt basis can only be used to deduct losses - it can't be used to take tax-free distributions. To determine what's "at-risk," look at whether you're personally liable for the debt. Credit cards where you signed personal guarantees would qualify. Business credit cards without personal guarantees typically wouldn't create debt basis. The interaction between stock basis and debt basis gets complex, especially when the S-Corp starts generating income. Income first restores stock basis, then debt basis. When losses occur, they first reduce stock basis to zero, then reduce debt basis. Given the complexity of your situation with negative equity and potentially guaranteed debt, I'd strongly recommend consulting with a CPA who has specific S-Corporation experience. The basis tracking rules are intricate, and getting it wrong from the start can create problems that compound over multiple tax years. Document everything now - which debts you guaranteed, when you guaranteed them, and keep detailed records of all future transactions affecting basis.

This is a great discussion thread that really highlights the complexity of S-Corp conversions from SMLLCs! As someone who went through a similar conversion two years ago (though with positive equity), I wanted to add a few practical considerations that might be helpful. First, regarding the $0 basis situation - while everyone's correctly pointed out that you can't have negative stock basis, it's worth noting that this doesn't mean you're in a bad position. Once your S-Corp starts generating income, that income will flow through and create positive basis before any distributions are made, which actually gives you more flexibility than you might think. Second, I'd recommend documenting your conversion date basis calculation very thoroughly. Create a balance sheet as of 12/31/2023 showing exactly what assets and liabilities transferred to the S-Corp structure. This becomes your "evidence package" if there are ever questions later about how you determined the initial basis. Third, consider the operational side of things - make sure you're following S-Corp formalities like corporate resolutions for major decisions, separate bank accounts, and proper payroll if you're taking salary. The IRS tends to look more closely at S-Corps that converted from single-member entities to ensure they're operating as true corporations. Finally, while the basis tracking seems daunting now, it actually becomes routine once you establish a good system. The key is consistency in your record-keeping from day one of the S-election. Hope this helps, and good luck with your first year as an S-Corp!

Something nobody's mentioned - if the mold remediation was medically necessary (like if someone in your household has a documented respiratory condition that was being affected by the mold), you might be able to deduct it as a medical expense. But there's a big catch: medical expenses are only deductible if they exceed 7.5% of your adjusted gross income AND you itemize deductions instead of taking the standard deduction.

Great discussion here! Just wanted to add one more angle that might be relevant - if your home was built before 1978, you should also check if any lead-based paint was disturbed during the mold remediation work. If the contractor had to do lead abatement as part of the process, that portion might qualify for different tax treatment. Also, since you mentioned this is your first home and you bought it in late 2023, make sure you're aware of any first-time homebuyer credits or programs in your state that might still apply to improvements made within the first year or two of ownership. Some states have specific programs for necessary health and safety repairs for new homeowners. The insurance angle mentioned above is definitely worth pursuing - even if your standard homeowners policy doesn't cover it, some policies have separate riders for environmental hazards that you might not be aware of. And definitely keep all that documentation organized regardless of immediate tax benefits - you'll thank yourself later!

I handle bookkeeping for several clients and see this situation often. What tax software are you planning to use? Some don't handle the "only 1099-INT income" situation very well and might incorrectly suggest you owe self-employment tax (you don't).

I'm in a similar boat - just got my first 1099-INT and wasn't sure about filing requirements. After reading through all these responses, it sounds like while you're not technically required to file with just $475 in interest income (well below the $14,600 standard deduction), there might still be good reasons to file a simple return anyway. The point about preventing automated IRS notices really resonates with me. I'd rather file a basic return and avoid any potential headaches down the road. Plus, if there was any federal tax withheld on your 1099-INT (check box 4), you'd definitely want to file to get that refunded. Have you checked whether your state has different filing requirements? That seems to be catching a lot of people off guard based on what others are sharing here.

One thing to keep in mind that hasn't been mentioned yet - make sure you keep meticulous records of when you actually convert the property from rental to primary residence. The IRS will want clear documentation of the conversion date, which affects your qualified vs non-qualified use calculations. I'd recommend documenting things like: when you moved in, utility transfers to your name, voter registration changes, driver's license updates, and any lease terminations with tenants. Also keep records of any improvements you make after converting it to primary residence, as these can increase your basis and potentially reduce your taxable gain. The devil is really in the details with these conversions, and having solid documentation will save you headaches if you ever get audited. I learned this from a friend who had to reconstruct his timeline years later when the IRS questioned his conversion date.

This is such a valuable discussion! As someone who's been considering this exact strategy, I wanted to add a few points that might help others thinking about rental-to-primary conversions. One thing I've learned from researching this is that the "2 out of 5 years" rule for primary residence can be tricky with conversions. You need to live in the property as your primary residence for at least 2 years during the 5-year period ending on the sale date. But as others have mentioned, the non-qualified use periods (rental time after 2008) will reduce your exclusion proportionally. Also, don't forget about the timing of when you take depreciation. If you're planning to convert a rental property, you might want to consult with a tax professional about whether to continue taking depreciation right up until conversion or stop earlier. The depreciation recapture at 25% applies to ALL depreciation taken (or allowed to be taken), so this could affect your overall tax strategy. For anyone just starting to consider this path, I'd recommend running the numbers on multiple scenarios - different rental periods, different sale timing, etc. - before making the initial purchase. The tax implications can really impact the overall profitability of the investment strategy.

Something that helped me understand this better was thinking about it like this: the simplified method on line 30 is basically the IRS saying "we know home offices have certain standard costs, so here's a flat rate that covers all the typical stuff." When you take that $5 per square foot deduction, you're essentially telling the IRS "I'm using your standard allowance for all my home office space costs" - which includes utilities, a portion of mortgage/rent, insurance, repairs, etc. That's why you can't then turn around and also claim those same types of expenses in Part 2. But here's what I found really important to track separately: any business expense that you'd have regardless of WHERE your office is located. Computer equipment, business software, office furniture, professional memberships, business insurance - these aren't "home office space" costs, they're just regular business expenses that happen to be used in your home office. The confusion often comes from thinking the simplified method means you can't deduct anything else business-related, but that's not true. It just means you can't double-dip on the costs of maintaining the physical space itself.

I went through this exact confusion when I first started my home-based consulting business! What really helped me was creating a simple mental checklist: **If I choose the simplified method (line 30), I CANNOT also claim:** - Any portion of mortgage interest for the office space - Property taxes allocated to the office - Utilities (electric, gas, water) for the office area - Home insurance allocated to the office - Repairs and maintenance for the office space **But I CAN still claim in Part 2:** - Office supplies and materials - Business equipment and software - Professional licenses and subscriptions - Business meals and travel - Marketing and advertising costs - Professional services (legal, accounting, etc.) The way I remember it: the simplified method covers the "housing" of my business, but not the actual business operations. It took me a couple years to get comfortable with this distinction, but once it clicked, filing became so much easier! One last tip: I always run the calculation both ways in a spreadsheet before deciding. Sometimes the math surprises you, especially if you have high utility costs or a larger office space.