Michael Gray, CPA's

Real Estate Tax Letter

January 30, 2012

© 2012 by Michael C. Gray
ISSN 1930-0387

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

Table of Contents

Happy New Year!

The New Year is traditionally a time for setting personal and business goals. We hope we can play a part in that goal setting process, but more importantly in helping you achieve your goals. In any event, we hope 2012 will be a great year for you and your family!

Return to Table of Contents

Tax preparation materials are on the way.

We are mailing instructions to our clients this week. If we prepared your tax returns last year and you haven’t received instructions by January 20 or you would otherwise like to receive instructions, call Dawn Siemer on a Monday, Wednesday or Friday at 408-918-3162.

Return to Table of Contents

Make your tax preparation appointment now.

If you would like to schedule an appointment for a tax preparation interview, also please call Dawn Siemer on a Monday, Wednesday or Friday at 408-918-3162.

Return to Table of Contents

W-2s, 1099s and DE 542 reminder.

Remember that most 2011 annual information returns, such as W-2s and 1099s, should be issued to payees by January 31 and sent to the tax authorities by February 29.

Also remember that Form 542, Report of Independent Contractors, should also be submitted for ongoing independent contractor arrangements by January 20. The due date is the earlier of 20 days after the date $600 or more of payments have been made to the independent contractor or the date a contract has been entered for $600 or more of services during a calendar year.

Requirements for real estate operators to issue Forms 1099 for services starting for 2011 were repealed. So was the requirement to issue 1099s to corporate payees. (1099s must still be issued for business payments of $600 or more to incorporated lawyers and doctors.)

Return to Table of Contents

Payroll tax letter.

We have prepared a letter summarizing requirements for payroll tax withholding and annual information returns. If you would like a copy, please call Dawn Siemer at 408-918-3162.

Return to Table of Contents

Time to update your payroll software.

Remember that, since new payroll limits and withholding tables apply for 2012, your payroll processing software has to be updated to incorporate that information.

Return to Table of Contents

IRA charitable break expires.

The ability to avoid federal income tax on an IRA distribution of up to $100,000 by paying the money directly to a charity ended after 2011.

Return to Table of Contents

Many tax provisions scheduled to expire after 2012.

The Bush tax cuts, including the 35% maximum tax rate on ordinary income and 15% tax rate on long-term capital gains is scheduled to expire after 2012. The $5 million lifetime exemption equivalent for gifts, estate tax and generation skipping tax is also scheduled to expire after 2012. A huge item scheduled to expire after 2012 is the exclusion from taxable income of cancellation of debt for a principal residence.

These changes will make it very difficult to plan for 2012. Many of these rules will probably be extended, but I don’t expect it to happen until after the 2012 Presidential election. Remember the old saying, nobody’s life, liberty or property is safe when Congress is in session.

Return to Table of Contents

Payroll tax break extended.

On December 22, 2011, Congress passed and President Obama signed The Temporary Payroll Tax Cut Continuation Act of 2011 (HR 3765). Under the Act, the employee portion of the Social Security tax is reduced by 2% for the first two months of 2012. If employees have more than $18,350 of social security wages, they will have to repay the 2% tax on the excess with their income tax returns.

Most commenters believe that Congress will eventually extend the reduction for all of 2012, which would eliminate the repayment requirement.

Self-employed persons get the 2% reduction for up to $18,350, less any FICA wages received up to $18,350 for the first two months of 2012.

Return to Table of Contents

Business mileage rate unchanged.

The IRS has announced the business standard mileage rate for 2012 is 55.5¢ per mile, the same as for the second half of 2011. The standard mileage rate for medical and moving expenses is 23¢ per mile, compared to 23.5¢ per mile for 2011. The mileage rate for donations is unchanged at 14¢ per mile.

(Notice 2012-1.)

Return to Table of Contents

Donation deduction lost but capital gain upheld for part sale, part gift.

A limited liability company sold right of first refusal rights for a farm to the Nature Conservancy for less than the fair market value. The transaction was reported as part sale, part gift, including a charitable contribution deduction of $2,068,245 and a long-term capital gain of $9,136,593.

The Tax Court upheld the IRS in disallowing the charitable contribution deduction. The acknowledgement letter received by the LLC from the Nature Conservancy didn’t disclose items or real estate received as partial consideration for the gift.

The Tax Court held against the IRS relating to the nature of the gain. The IRS claimed the gain should be taxed as ordinary income, because it was a transfer of personal rights and not a “sale or exchange” of a capital asset. The Tax Court said the whether the transaction was a sale or exchange should be determined liberally.

This is a very involved case that should be studied carefully.

(M.J. Cohan v. Commissioner, T.C. Memo. 2012-8, January 10, 2012.)

Return to Table of Contents

Family partnership interests given to children included in taxable estate.

Dr. Liljestrand set up a revocable living trust to hold real estate. Then he transferred the real estate to a family limited partnership during 1997, and transferred interests in the FLP to his children during 1998 and 1999. The individual who was the manager of the properties and trustee of the trust also received an interest in the FLP.

Separate books and records weren’t set up for the FLP and a tax return wasn’t filed for the FLP until tax year 1999.

The assets of the FLP were commingled with those of the trust, and all of the income of the FLP was used to pay Dr. Liljestrand’s personal expenses.

The values of the gifts to the children were not documented with professionally-prepared appraisals.

The Tax Court upheld the IRS in finding the partnership interests of the children should be included in Dr. Liljestrand’s taxable estate because the transfers to the children were not made for adequate and full consideration and Dr. Liljestrand retained enjoyment of the transferred assets during his lifetime.

The moral is you must pay attention to the details when setting up and operating a family limited partnership or your family won’t receive the benefits of your planning.

(Estate of Paul H. Liljestrand v. Commissioner, T. C. Memo. 2011-259, November 2, 2011.)

Return to Table of Contents

Deduction for flying lessons disallowed.

A commercial real estate broker deducted the cost of flying lessons. He claimed the expenses related to his real estate business. The Tax Court upheld the IRS in disallowing the deductions. It was not a customary business practice for real estate brokers to fly an airplane. Aerial photographs could be obtained without flying an airplane yourself.

(R.L. Hand, TC Summary Opinion 2012-1, January 4, 2012.)

Return to Table of Contents

Passive activity losses suspended.

A taxpayer claimed current deductions for rental losses as an offset against other income, claiming he was a real estate professional. He also had a full-time job as a salesperson. The Tax Court upheld the IRS in disallowing the current deductions because the taxpayer didn’t maintain contemporaneous records showing that he worked more than 750 hours in the real estate business and that more than one-half of his working hours were devoted to real estate activities. Accuracy related penalties for a substantial understatement of tax liability were also upheld.

(Raymond and Kathleeen Vandegrift v. Commissioner, TC Memo 2012-14, January 12, 2012.)

Return to Table of Contents

Payment for interim taking of two properties was rental income.

A taxpayer filed amended returns, claiming that a settlement received for the interim use of property relating to an involuntary conversion should qualify for deferral as part of the involuntary conversion. The IRS National Office directed that the settlement payment should be reported as rental income and didn’t qualify as part of the involuntary conversion proceeds.

(Field Service Advice 20115101F, December 29, 2011.)

Return to Table of Contents

Time extended for election to expense environmental remediation expenditures.

The IRS granted a request for extension of time to elect to expense environmental remediation expenditures. The tax return preparer submitted an affidavit that he or she was unaware that the work related to a qualified contaminated site for the election.

It’s useful to know that the IRS has the discretion under Internal Revenue Code Section 9100 to extend the time to make an election when a due date is missed. Sometimes an application fee can make it prohibitively expensive, but there are many situations described in the Treasury Regulations when an automatic extension is granted.

(LTR 201149016, August 31, 2011.)

Return to Table of Contents

Temporary regulations issued for when expenditures may be currently deducted or are required to be capitalized.

The IRS has issued temporary regulations describing when expenditures may be currently deducted and when they must be capitalized. The regulations are intended to clarify when an expenditure is for a repair or maintenance that can be currently deducted and when an expenditure is for a capital improvement that may be added to the cost of nondepreciable items, like land, or to depreciable or amortizable items, like a building. An election is available to deduct some materials and supplies under the de minimus rule.

(T.D. 9564, December 28, 2011.)

Return to Table of Contents

California construction contractors can now be LLCs.

Thanks to a change in the Business and Professions Code and Corporations Code enacted on September 30, 2010 in Senate Bill 392, construction contractors that are organized as LLCs can now receive a license from the Contractor State License Board, effective January 1, 2012.

(Tax News, January 2012, California Franchise Tax Board, page 24.)

Return to Table of Contents

Accrual basis taxpayer couldn’t use recurring items exception.

An accrual basis corporation prepaid expenses for a business lease and for a service contract. The expenses for these items were prorated over the time they applied for financial statement reporting. The taxpayer asked the IRS whether it could deduct the expenses under the recurring item exception as immaterial. The IRS said that since the items were considered to be material enough to prorate them for financial reporting and prorating them resulted in a better matching of the expenses with income, they didn’t qualify for the recurring item exception.

(Revenue Ruling 2012-1.)

Return to Table of Contents

Franchise Tax Board will require property tax parcel numbers for 2012.

The Franchise Tax Board has postponed requiring disclosing the parcel number for property tax deductions for 2011, but plans to require the information on 2012 income tax returns. There will also be a line on the form to indicate the portion of the payment that is not deductible. The requirement will only apply to property taxes deducted as itemized deductions on Schedule A. In order to be deductible, the tax must be based on the value of the property.

(Spidell’s California Taxletter, January 1, 2012, page 1.)

Return to Table of Contents

Financial Insider Weekly time and day changes for Hayward, Alameda and Fremont.

Effective January 18, 2012, the days and times that Financial Insider Weekly is broadcast in Hayward, Alameda and Fremont will change to Wednesdays and Fridays at 8 p.m. The show is broadcast on Comcast channel 28 and, in California, AT&T U-verse channel 99 (Hayward).

Return to Table of Contents

Financial Insider Weekly broadcast schedule for February.

Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 8:00 p.m., Pacific Time. You can watch it on Comcast channel 15 for San Jose and Campbell. The show is broadcast as streaming video at the same time at www.creatvsj.org.

Here are the scheduled interviews for February:

February 3, 2012, David Beck, CFP®, Bay Area Planners, “How tax benefits help finance a college education”
February 10, 2012, Hilary Martin, CFP®, The Family Wealth Consulting Group, “Planned saving to reach your financial goals”
February 17, 2012, Professor Patricia Cain, attorney, Santa Clara University, “Income tax problems of same-sex couples”
February 24, 2012, Professor Patricia Cain, attorney, Santa Clara University, “Estate and gift tax problems of same-sex couples”

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!

Return to Table of Contents

Questions and Answers

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.

Return to Table of Contents

Follow me on Twitter, Facebook and LinkedIn!

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.

You can also follow me on other social media sites, Facebook and LinkedIn.

Return to Table of Contents

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.

Have employee stock options? Subscribe to our free newsletter, Michael Gray, CPA's Option Alert! To learn more, visit stockoptionadvisors.com/subscribe.shtml.

Return to Table of Contents

Check out my blog.

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

Return to Table of Contents

Subscribe to the Real Estate Tax Letter

Did you find this newsletter helpful? If so, subscribe now!

Return to Table of Contents

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

Find us on Facebook
Follow me on Twitter
Connect on LinkedIn
Connect on Google+
Our Blog
© 2018

Subscribe to Michael Gray, CPA's
Tax & Business Insight

We respect your email privacy