The Section 707(c) analysis is crucial here, but there's another angle to consider - the "material participation" test from Section 469. Even if your partnership is primarily holding real estate investments, if the partner receiving guaranteed payments materially participates in the partnership activities (which could include investment selection, property management decisions, financing arrangements, etc.), those guaranteed payments will likely be subject to SE tax. The IRS has been pretty aggressive in recent years about treating real estate investment activities as trades or businesses, especially when there's active management involved. Even if you're holding properties long-term, activities like tenant relations, maintenance oversight, refinancing decisions, or regular investment analysis can push you into "business" territory. Before restructuring, I'd strongly recommend getting a private letter ruling from the IRS if the amounts are significant. The cost of the ruling might be worth it compared to potential penalties and interest if you guess wrong on the SE tax treatment.

This thread has been incredibly helpful - thanks everyone for sharing your experiences and insights! Based on what I'm reading, it sounds like our partnership will likely be considered a trade or business by the IRS even though we're primarily holding real estate for appreciation. The distinction between guaranteed payments for services versus capital use that Amina mentioned is particularly interesting. Our intended guaranteed payments would likely be for the partner's time spent on investment analysis and property management oversight, which sounds like it would clearly fall into the "services" category and be subject to SE tax. Given the complexity and the potential costs involved, I think we're going to take Jason and Aisha's advice about getting professional guidance before restructuring. The private letter ruling option is worth considering given the amounts involved, even though the cost seems high upfront. Has anyone here actually gone through the PLR process for partnership tax issues? I'm curious about the timeline and what kind of documentation the IRS typically requires.

I went through this exact same situation two years ago! The confusion between refund amount and actual tax liability is so common. What helped me understand it was thinking of it this way: imagine you owe $10,000 in taxes for the year. If you had $12,000 withheld from your paychecks, you get a $2,000 refund. But if you only had $8,000 withheld, you owe $2,000. The actual tax you owe ($10,000) didn't change - just the timing of when you paid it. When both spouses work, the withholding system breaks down because each employer calculates withholding as if that's your only income. So if you each make $50k, each employer withholds as if you're in the tax bracket for $50k income, but you're actually in the bracket for $100k combined income. That's why you end up underwithholding. The good news is this is totally fixable for next year! Update both your W-4s and you'll be back to getting the refund you expect.

As someone who just went through this exact scenario, I wanted to add that it's also worth checking if your state has different rules for married filing. In our case, we live in a state with no income tax, but my coworker found out that her state actually penalizes married couples more than the federal system does. She ended up filing jointly for federal but separately for state to minimize her overall tax burden. Also, don't forget that filing jointly gives you access to certain tax credits and deductions that you can't get when filing separately - like the American Opportunity Tax Credit for education expenses and higher income limits for IRA contributions. These benefits often more than make up for any bracket concerns. The withholding issue everyone's mentioned is spot on though. We learned this the hard way and now make sure to have extra withheld from the higher earner's paycheck to avoid that end-of-year surprise.

I've been helping clients with rental property conversions for over 15 years, and I want to echo what several people have said about timing being critical. The IRS has very specific rules about when a property transitions from personal to business use. One thing I haven't seen mentioned yet is the potential impact on your capital gains exclusion. If this has been your primary residence for at least 2 of the last 5 years, you may be eligible for up to $500,000 in capital gains exclusion (married filing jointly) when you eventually sell. However, once you convert to rental use, the clock starts ticking on potentially losing part of that exclusion. The IRS uses a formula to determine how much of your gain is eligible for exclusion based on the ratio of personal use years to total ownership years. So if you're planning to hold this as a rental for many years, you might want to consider whether selling now and buying a dedicated rental property elsewhere makes more financial sense. Also, don't forget about depreciation recapture when you eventually sell. Every dollar of depreciation you claim on the rental will be subject to a 25% tax rate when you sell, regardless of your capital gains rate. These are complex decisions that really benefit from running the numbers with a qualified tax professional before you make the conversion.

This thread has been incredibly helpful! I'm in a similar situation and was leaning toward the LLC-while-living-there approach, but after reading all these responses, I'm convinced that's the wrong move. One question I haven't seen addressed: what about the home office deduction? I currently claim a home office deduction on part of my house. If I convert the property to a rental after moving out, how does that affect the basis calculation? Do I need to account for the fact that part of the house was already being used for business purposes? Also, for those who've gone through this conversion - how detailed do you need to be with the documentation? Is it enough to just get an appraisal and keep renovation receipts, or should I be photographing the condition of every room, documenting square footage, etc.? I'm trying to do this right from the start to avoid any issues down the road. The depreciation recapture discussion really opened my eyes to the long-term tax implications I hadn't considered!

As someone who used to volunteer with VITA (Volunteer Income Tax Assistance), I'd really encourage you to visit a VITA site for your situation. Look up "VITA free tax prep" and your city to find locations near you. Your case is complex and needs personal attention since it involves potential dependent claims as a minor. VITA volunteers are specially trained for situations like yours, particularly for lower-income families. They'll help determine if you can claim your siblings or if your mother should file even with only SSI income (sometimes filing is beneficial even without tax liability).

Just FYI - my cousin was in almost this exact situation (she was 17), and when she tried to claim her younger siblings, her return got flagged for review and was delayed by months. The IRS eventually allowed it after she submitted additional documentation, but it was a huge hassle. You might want to file on paper with a detailed explanation letter attached to avoid automatic rejections if you go this route.

One thing I haven't seen mentioned here is that different types of gambling might be treated differently. From what my tax guy told me, if you're playing poker (rather than slots or other casino games), the IRS might consider you a "professional gambler" if you play regularly and approach it systematically. This classification would completely change how you report gambling income and losses - it would go on Schedule C instead of as itemized deductions. This can be advantageous in some situations because you can deduct gambling-related expenses beyond just losses (travel, internet for online poker, etc.) I'm not saying this applies to the OP, but it's something to consider if poker is your main gambling activity and you approach it with a profit motive rather than just recreation.

I've been dealing with gambling taxes for a few years now and want to add some practical tips that have helped me stay organized and compliant. First, regarding your session strategy - you're absolutely right that ending a session after a big win like a handpay makes sense mathematically. Just make sure you document WHY you're ending the session (leaving the casino, taking a meal break, switching to a different casino, etc.) because the IRS wants to see legitimate reasons for session boundaries, not arbitrary ones designed solely for tax benefits. Second, I'd recommend getting familiar with Form W-2G thresholds. Casinos are required to issue these for wins over certain amounts ($1,200 for slots, $5,000 for poker tournaments, etc.), and the IRS automatically receives copies. So you MUST report these wins - there's no way around it. The good news is that having more W-2Gs actually gives you more documented wins to offset your losses against. Finally, don't forget about state taxes if applicable. Some states have different rules for gambling income and deductions, so make sure your session strategy works for both federal and state requirements. I learned this the hard way when I moved from Nevada to California and had to adjust my approach. Keep detailed records and you'll be fine. The key is being able to tell a coherent story about your gambling activities if you ever get questioned.