Michael Gray, CPA's

Real Estate Tax Letter

June 9, 2010

© 2010 by Michael C. Gray
ISSN 1930-0387

A monthly report focusing on tax issues for the homeowner and real estate investor.

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No more classrooms, no more books…

Summer vacation will soon be here, or already is. Drive carefully, with those kamikaze kids out there! Congratulations and good luck graduates!

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Do you need help with finishing extended income tax returns, preparing amended income tax returns, or tax audits?

Now that April 15 has passed, it’s time to focus on finishing extended income tax returns. Some of our readers have found errors in or are uncomfortable with tax returns that they prepared using tax software or were prepared by other tax return preparation companies. We can provide a second opinion. Others have received notices for tax audits and sometimes can’t get the help they need from their tax return preparer. We can help with all of these. To make an appointment, call Dawn Siemer Mondays, Wednesdays or Fridays at 408-918-3162 from 9 a.m. to 5:30 p.m.

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Silicon Valley Tax Professionals Save The Date!

Michael Gray, CPA will be giving a seminar, The Federal Tax Return Preparer Disclosure and Use Rules (IRC Section 7216) – A Threat To Your Practice and Our Profession?, for the Tax Interest Group of the San Jose Silicon Valley CPAs. The seminar will be a breakfast meeting at Lou’s Village in Los Gatos, California starting at 8 a.m. For details, visit the CalCPA web site at www.calcpa.org or call Stephanie Stewart at 408-983-1122.

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Second estimated tax payment due.

The second individual income tax estimated tax payment is due June 15. The second federal estimated tax payment is 25% of the 2010 total, but the second California estimated tax payment is 40% of the 2010 total. High-income California taxpayers should also remember that the "protected estimate" exception based on last year’s income tax return doesn’t apply for taxpayers who have $1 million of taxable income or more. Some taxpayers are required to make California estimated tax payments online. See your tax advisor for details or call Dawn Siemer for an appointment at 408-918-3162.

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Annual reports for foreign accounts and trusts and receipt of foreign gifts due.

Each year, a report must be filed for foreign bank and brokerage accounts owned by US residents and citizens for which US residents and citizens have signature authority. The form for accounts is TD F 90-22.1, Report of Foreign Bank and Financial Accounts. The forms for trusts are Forms 3520 and 3520-A, Annual Report of Transactions with Foreign Trusts and Receipt of Foreign Gifts, and Annual Information Return of a Foreign Trust With A U.S. Owner. You can get the forms at www.irs.gov.

These returns are due at the same time as the taxpayer's income tax returns for the tax year, including extensions. The penalties for failure to file can be onerous, starting at $10,000. Congress and the IRS are giving a lot of attention to this area, including requiring reporting by foreign banks. Don’t think you can "skate by".

If you have a question whether you are subject to these reporting requirements, see a tax consultant immediately.

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Information reporting expansion a nightmare for businesses.

A revenue raising provision of the Health Care Reform legislation greatly expands information reporting requirements for businesses. Information returns or "1099s" are the forms most people receive for interest in their savings accounts and dividends and sale proceeds for their investment accounts. Beginning in 2012, businesses will be required to issue these forms for payments for property and payments to corporations. Although there is a $600 threshold before an information return is required, imagine having to issue information returns for buying office supplies at Office Depot or computer equipment at Fry’s Electronics. The mountains of paper required might wipe out a forest, not to mention the waste in productivity required to comply with the requirement. (The fact it might save the U.S. Post Office is small comfort.)

Please write your representatives in Congress and urge them to reconsider this requirement and repeal it.

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Tax extenders bill passes the House.

The House of Representatives has passed the "American Jobs and Closing Tax Loopholes Act." It hasn’t passed the Senate, yet. The bill includes a number of tax extenders, including the additional standard deduction for property taxes, state and local sales tax deduction, exclusion for up to $100,000 of IRA contributions to charities, and the research tax credit. Notably, there is no AMT "patch" in the bill. A key revenue raiser is subjecting income of certain professional service S corporations to self-employment tax. Another will recharacterize 50% for 2011 and 2012 and 75% after 2012 of capital gains for "carried interests" in a partnership to ordinary income. (Carried interest means that income is being allocated to a partner in exchange for services without a capital contribution.)

If you are in the process of forming a professional services S corporation, be alert for this change. You might be better off with an LLC (not permitted in California and certain other states) or LLP.

I’ll give more details when and if the legislation passes and President Obama says he’ll approve it.

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Blog post about California home credits.

Here is a link to my blog post about California tax credits for purchasing a new principal residence and for first-time homebuyers. michaelgraycpa.com/2010/05/28/california-credits-for-new-homes-and-first-time-buyers-will-go-fast/

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Blog post about cancellation of debt and passive activity loss rules.

Here is a link to my blog post about the characterization of cancellation of debt income for rental properties to use passive activity losses. michaelgraycpa.com/2010/05/19/tax-help-for-rental-property-debt-cancellation/

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Blog post about failed exchanges.

The IRS has issued a Revenue Procedure giving tax relief for taxpayers whose tax-deferred exchanges failed when the qualified intermediaries became bankrupt and didn’t complete the exchanges. Here’s a blog post with some details. michaelgraycpa.com/2010/06/09/irs-gives-relief-for-failed-exchanges-when-intermediary-becomes-bankrupt/

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No charitable deduction allowed for façade easement.

A married couple donated a qualified conservation façade easement on their home to a qualified tax-exempt trust. The home was located in a historic preservation district.

The Tax Court upheld the IRS in disallowing the deduction, because a mortgage encumbering the property providing priority to the bank in case of a sale disrupted the protection in perpetuity for the façade easement.

(Kaufman v. Commissioner, 134 TC No. 9.)

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Tax Court reduces valuation discounts for vacation home gifts.

Taxpayers each contributed their one-half undivided interests in a vacation home into separate qualified personal residence trusts. On their gift tax returns, they claimed a 30% discount for their separate interests.

The IRS limited the discounts to 15%.

After listening to experts for the IRS and the taxpayers, the Tax Court found neither to be persuasive and concluded the overall discount should be 17%.

(Ludwick v. Commissioner, TC Memo 2010-104.)

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Deductions disallowed for vacation home.

The Tax court disallowed $20,000 of deductions for a property reported by a taxpayer as rental property. The deduction was claimed for 2004. In that year, the residence was rented three times for 12 days and 9 nights. The taxpayer visited the house with his family eight times for 27 days and 19 nights.

The average period of customer use was three days. Under the passive activity loss rule, an activity is not a "rental activity" if the average period of customer use is seven days or less. Therefore, the rental of the cabin was not a rental activity and the loss didn’t qualify for the $25,000 per year deduction.

Further, a property is a residence if personal use exceeds the greater of 14 days or 10% of the days it is rented during the year. The taxpayer failed to show that his visits were solely for maintenance, and the personal use by family members was attributed to the taxpayer.

Therefore, the loss was a personal loss.

However, rental of a vacation home for less than 15 days is excluded from taxable income, and taxes and mortgage interest for the property were deductible as itemized deductions.

This is a case worth studying when you have a vacation home that you visit for maintenance or personal use.

(Akers v. Commissioner, TC Memo 2010-85.)

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Financial Insider Weekly broadcast schedule for June and July.

Financial Insider Weekly is broadcast in San Jose and Campbell on Wednesdays at 4:30 p.m., Pacific Time. You can watch it on Comcast channel 15 for those cities. The show is broadcast as streaming video at the same time at www.creatvsj.org.

Here are the scheduled interviews for June and July:

June 9, Hilary Martin of The Family Wealth Consulting Group, TBA
June 16, Craig Martin of The Family Wealth Consulting Group, "Alternative investments"
June 23, Attorney Michael Desmarais, "Estate planning for the second marriage"
June 30, Attorney Michael Malter of Binder & Malter, LLP, "What you should know about bankruptcy for individuals"
July 7, Attorney Scott Haislett, "1031 exchanges of real estate"
July 14, Attorney Scott Haislett, "Sale of a principal residence"
July 21, Attorney Naomi Comfort of Hawks & Comfort, LLP, "Special needs trusts"
July 28, Peggy Martin, ChFC of The Family Wealth Consulting Group, "The role of life insurance in your estate and financial planning"

Financial Insider Weekly is also broadcast as follows:

Back episodes available at https://www.youtube.com/user/financialinsiderweek.

Let me know any ideas that you have for topics or guests. Guests will usually have to be located in or near the Silicon Valley in California.

Hope you can watch or record the show. Please tell your friends about it!

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Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter.

Dear readers:

Many of your questions relate to the sale of a principal residence. We have an article at our web site, "Could your residence be the ultimate tax shelter?" (www.realestateinvestingtax.com/residence.shtml) where you should be able to find the answers to most of these questions.

Many other questions relate to short sales and foreclosures. See our article on that subject at www.realestateinvestingtax.com/shortsale.shtml.

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Follow me on Twitter!

If you enjoy Twitter, please follow me at www.twitter.com/michaelgraycpa. I would especially appreciate retweets of our messages announcing episodes of Financial Insider Weekly.

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Do you know about our other newsletters?

For general tax developments, tax planning ideas, business development ideas and book reviews, subscribe to Michael Gray, CPA's Tax & Business Insight at taxtrimmers.com/subscribe2.shtml.

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Check out my blog.

I have also started a blog at www.michaelgraycpa.com. Check it out!

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Michael Gray, CPA
2482 Wooding Ct.
San Jose, CA 95128
(408) 918-3162
FAX: (408) 938-0610
Hours: 8am - 5pm PDT Monday - Friday

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