luckily I have been filing my SC returns!
Thats a good thing, and I really don't concern myself with what others may say or think on that front.
I just don't think they're going to change related to this since this is not SC income.
What makes you think the rent received for the SC property is not SC income? It most certainly is. But, you offset the taxability of that income by reporting the rental income/expenses to the state, so as to show the state you are "in fact" operating at a loss, thus justifying you not paying any taxes on that income to SC.
This will come into play big time, in the tax year you sell the SC property, as your PAL carry over losses will offset your taxable income on any gain realized from the sale. Not only for SC state taxes, but also for your resident state taxes and federal taxes.
Depending on how SC treats depreciation, you can probably expect SC to tax you on recaptured depreciation taken, or the depreciation you "should" have taken.
How does the IRS know if a family member officially rented vs vacant, or non- family member rent for less than FMV?
The federal tax system works mostly on the honor system. But there's several ways they could know. First, they have to look. I do know that the IRS will do "ramdom draws" every year on tax returns to "take a closer look at". Most of those closer looks check out just fine. But there are those that "raise eyebrows" usually resulting in a letter from the IRS requesting some type of proof or verification for expenses claimed, or income received.
As an example, if one sees a significant reduction in rental income on a property from the previous year, that "could" raise an eyebrow. There could very well be a legitimate reason for it too. Maybe not.
Now on the "random draw" thing, I kinda wonder if they're still doing that since they were backlogged for more than a year with the COVID shutdown lasting so long. Also, if you recall the IRS wants to hire 87,000 more agents in addition to the 82,000 they already have. It's a good bet they don't want those extra agents to go after rich people.
I'll just kick the can down the road as far as recapturing depreciation I should have taken or not.
The IRS will love you for that. Especially if/when it bumps you into the next higher tax bracket.
If possible, you should do a "sit down face-to-face" with a CPA so they have all the details to make things right. Also, ensure they provide you with a copy of your tax return(s) that includes all worksheets and calculation forms so you can actually see, trace, and "follow the numbers" to understand how a figure is arrived at. You'll need that information if you want to continue using Turbotax after the CPA has fixed things right. Confirming the validity of your 1031 exchange is first and foremost, keeping in mind you are the one that has to "prove it" to the IRS is questioned on it.
Three rules to keep in mind when dealing with the IRS.
1) You are guilty until proven innocent.
2) The burden of proof is on the accused (that would be you!) and not the accuser.
3) If it's not in writing, then it did not occur.
As far as I know for now, congress has not approved the funding for 87,000 more agents. But that doesn't mean that can't change with the next election cycle, or the one after that, or the one after that, or the..... you get my point.
