One thing I learned from my reconsideration (approved last month!) is to include a table of contents and tab/label all supporting documents. My CPA made a cover page for each disputed item with a summary of why the original determination was incorrect and what documents were attached to support our position. Made it super easy for the reviewer to follow.

This thread has been incredibly helpful! I'm a tax professional who's handled about a dozen audit reconsiderations over the past few years, and I want to add one crucial point that I haven't seen mentioned yet. Always include a specific timeline in your reconsideration letter showing when events occurred and when documentation was created. The IRS needs to understand why certain information wasn't available during the original audit. For example, if bank statements were requested but the taxpayer's bank had a processing delay, or if medical records weren't released until after the audit closed - spell this out clearly. I also recommend including a brief "procedural history" section that summarizes what happened during the original audit, what was requested, what was provided, and what the final determination was. This helps the reconsideration reviewer understand the full context without having to dig through the original audit file extensively. One more tip: if you're dealing with multiple tax years, submit separate reconsideration requests for each year even if the issues are similar. The IRS processes these by tax year, and combining them can actually slow things down.

I've been following this thread as someone who went through a house buyout during my divorce last year, and I wanted to add one more perspective that might be helpful. While everyone has covered the tax implications really well (and yes, your $122,500 should be tax-free), I learned something important about the actual mechanics of receiving the buyout money. Make sure your settlement agreement specifies exactly HOW you'll receive the $122,500. In my case, we initially agreed that my ex would refinance and pay me out, but we didn't specify whether it would come from the refinance proceeds, his personal savings, or some combination. This became a huge issue when the refinance was delayed due to some credit problems he hadn't disclosed. I'd recommend requiring that the funds come directly from the refinance closing - meaning you (or your attorney) should be present at the closing or have the title company send you a certified check directly from the proceeds. This protects you from any "I don't have the money right now" situations that could drag things out for months. Also, consider asking for interest to accrue if the buyout is delayed beyond a certain date. I wish I had done this because my ex dragged out the refinance for an extra 4 months, during which time I was still technically responsible for half the mortgage but not living there or benefiting from the property. The tax stuff is important to get right, but don't forget about protecting yourself on the practical side of actually getting paid!

I'm a CPA who specializes in divorce taxation, and I wanted to add a few key points that haven't been fully addressed yet. While everyone is correct that your $122,500 buyout should be tax-free under IRC Section 1041, there's an important timing consideration for your 2025 tax return. Since the transfer is happening in 2025, you'll need to report it on Form 8949 and Schedule D, even though there's no taxable gain. The IRS wants to see the transaction reported with the proper codes indicating it was a divorce-related transfer. Many people mistakenly think they can just ignore it entirely on their return. Also, regarding your $80,000 in improvements - make sure you're calculating your adjusted basis correctly. Your basis starts at $320,000 (purchase price) plus qualifying improvements. When you transfer half the property to your ex, your basis in that half would be roughly $200,000 (half of $320,000 + $80,000). Since you're receiving $122,500 for something with a basis of $200,000, you'd actually have a loss, not a gain - which is another reason why taxes aren't an issue here. One final tip: keep a copy of Form 8332 handy if you have children and are transferring dependency exemptions as part of your divorce agreement. This often gets overlooked until tax time, and it can create complications if not handled properly upfront. Your situation looks straightforward from a tax perspective, but proper reporting and documentation will be crucial for your 2025 return. Good luck with everything!

I'm confused by all this. So if I make $30k total but only have 1099s for $20k, I just put $30k on my Schedule C and that's it? I don't need to tell them which income came from where? I've been itemizing each client separately and its so time consuming!

Just to add some reassurance from personal experience - I had this exact scenario happen to me two years ago. I was a freelance graphic designer reporting about $32,000 in total income, but I never received 1099s from three of my smaller clients (totaling around $5,500). I was really nervous about it too. I reported my full $32,000 on Schedule C anyway, and my return processed completely normally with no delays. The IRS received 1099s for about $26,500, so my reported income was higher than what they had on file. No red flags, no correspondence, nothing. The key thing to remember is that the IRS computer systems are looking for underreporting, not overreporting. When you report MORE than what's on the 1099s they received, it just means you had additional income sources (like cash payments) which is totally normal for sole proprietors. Your refund shouldn't be delayed at all since you're being conservative and reporting everything. The matching happens after your return is processed anyway, so it won't hold up your refund.

Has anyone used the "Safe Harbor" method for reporting this? My accountant mentioned it might be easier than trying to calculate everything precisely, especially since my renovation invoices weren't all perfectly organized.

This is a great question that many rental property owners face! Just to clarify a few key points that haven't been fully addressed: 1. **Timing matters**: Since you stopped renting the property in mid-2020 but didn't sell until 2021, you'll need to be careful about the "placed in service" vs "conversion" dates when calculating your depreciation recapture. 2. **Renovation costs**: All your renovation costs from 2020-2021 do increase your basis, even though the property wasn't being rented during that time. These are capital improvements that reduce your overall gain. 3. **Form 4797 is correct**: As others mentioned, you'll use Form 4797 even though you weren't actively renting in 2021. The property's rental history makes this the appropriate form. 4. **Don't forget state taxes**: While everyone's focused on federal treatment, make sure to check your state's rules for depreciation recapture - they don't always follow federal guidelines exactly. One thing I'd suggest is gathering all your depreciation schedules from 2019-2020 to ensure you're using the exact amount you actually claimed, not an estimate. The IRS has records of what you deducted, so accuracy here is crucial to avoid any discrepancies.

Great question! As someone who's dealt with similar withholding confusion, I can share what I learned. The difference between claiming 0 vs 1 on the old-style W4 typically results in about 3-5% more withholding when you claim 0, but this varies based on your income level and filing status. Since you mentioned you were at roughly 22% withholding with 1 allowance, switching to 0 would likely bump you up to around 25-27% total withholding. For someone at your income level (based on that 22% rate), you're probably looking at an additional $50-100 per paycheck being withheld. However, given that you were exempt for 6 months AND have legal fees coming up, I'd actually recommend using the new W4 form if your employer allows it. You can leave the allowances section blank (equivalent to claiming 0) and then add a specific dollar amount on line 4(c) for additional withholding. This way you can cover both catching up from your exempt period and preparing for those legal fees. The IRS withholding calculator is free and can help you figure out exactly how much extra to withhold based on your specific situation. Just make sure to account for the full year's tax liability, not just the remaining months!

Just wanted to chime in as someone who recently went through this exact transition! I was also exempt for several months and had to figure out the withholding situation when switching back. From my experience, the jump from 1 to 0 on the old W4 increased my withholding by about 4.1% (I make around $55k). But honestly, the bigger issue you'll want to focus on is catching up from those 6 months of being exempt. I made the mistake of only thinking about future withholding and got hit with underpayment penalties. Here's what I wish I had done differently: Calculate your total annual tax liability first, figure out what you should have paid during those 6 exempt months, then add that "catch-up" amount to your expected legal fees. Then you can determine if claiming 0 plus additional withholding on line 4(c) will cover everything. I ended up using one of the tools mentioned earlier in this thread (the IRS calculator) to figure out I needed about $280 extra per paycheck to cover my shortfall plus some upcoming expenses. Way easier than trying to guess at percentages! The good news is that once you get this sorted, you can always adjust your W4 again if you're over-withholding. Better to err on the side of caution given your situation.