If the IRS adjusted their return, does that mean they need to amend their state return too? I had something similar happen and wasn't sure if state taxes would be affected.

It depends on what the adjustment was for. If the IRS adjustment was for something that affects your state taxes (like adjusted income or deductions), then yes, you may need to amend your state return. However, many IRS adjustments don't impact state taxes at all. For example, if the adjustment was related to federal tax credits that don't exist at the state level, then your state return would be unaffected. I'd recommend checking your state tax authority's website or giving them a call to confirm whether you need to file an amendment based on a federal adjustment.

Does TurboTax not catch this stuff automatically? I thought it was supposed to import all your tax forms and prevent these kinds of mistakes?

Thanks for all these details! I've been trying to keep track of everything but wasn't sure about the mileage. How do you handle splitting things like the mortgage interest between the rental side and my side? Is it just 50/50 since it's equal units, or is there more to it?

Generally for a duplex with equal units, a 50/50 split is acceptable and what most people do. However, if one unit is significantly larger than the other (like one is 60% of the total square footage), you should use that ratio instead. For tracking mileage, I use a simple app that lets me log trips specifically for rental property purposes. You'll want to record the date, starting/ending mileage, and purpose of each trip. At tax time, you can claim the standard mileage rate (which changes yearly) for all those miles. It adds up fast and is often overlooked!

And if you use tax software instead of a CPA, you can still deduct the cost of the software proportionally for the rental property part! I just allocate based on how many forms are for personal vs rental.

This is super important! My friend had this exact situation and ended up in small claims court because she couldn't immediately refund the prepaid rent when the tenant left early. Make sure your lease specifically addresses this!

That's a really good point about small claims court! I hadn't even thought about the legal implications. I'd suggest putting a clause in the lease that clearly states the prepaid rent is non-refundable, or alternatively, spell out exactly how refunds would be calculated including any penalties for breaking the lease early. The more specific you can be in the lease, the better protected you'll be if things go south.

That's actually what I do with my tenants! Quarterly payments are much easier to manage than monthly but don't create as many tax headaches as annual payments. Plus if something goes wrong, you're only out a few months rather than a whole year.

How would you verify if the company is legitimate? I got offered something similar recently and now I'm worried.

Good question! Here are some ways to verify legitimacy: Research the company name + "scam" or "reviews" online. Check for a professional website with proper contact information, physical address, and company registration details. Be suspicious if they have no online presence or very new websites. Look them up on business registries. For UK companies, you can check Companies House (the UK's official company register). If they claim to be a registered business but don't appear in official records, that's a major red flag.

Did you have to file any special forms because the company was foreign? I'm starting something similar next month.

What about the prior year loss issue? If they reclassify prior years, won't that potentially create passive loss limitations that weren't applied before? Could that actually hurt the partners if they didn't have other passive income in those years?

You raise a valid concern. Reclassifying prior year income/losses from ordinary to rental could trigger passive activity loss limitations that weren't previously applied. If the partners didn't have sufficient passive income from other sources, some losses that were previously deducted might be suspended. This requires a careful analysis of the partners' entire tax situation for those years. The self-rental rule might actually help here - if the rental partnership leases to a business in which the partners materially participate, the rental income might be treated as nonpassive under the self-rental recharacterization rules, which could allow the losses to remain deductible. It's definitely worth running the numbers both ways before amending.

You absolutely need to separate those activities. The rental portion should be reported separately from the operating business. There are several ways to handle this, but the simplest is probably to report the business operations on page 1 and the rental activity on Schedule K and the appropriate rental real estate income lines. This ensures the rental income isn't subject to SE tax.