Michael Gray, CPA's
Real Estate Tax Letter
February 10, 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
- Tax season is here! Make your appointment now!
- W-2s, 1099s and DE 542 reminder.
- Some California businesses required to file use tax returns.
- Schedule D radically changed for 2011 individual taxes.
- IRS Chief Counsel says any reasonable method may be used for mortgage interest deduction limits.
- Taxpayer couldn't change an agreed cost allocation with a later cost segregation study.
- IRS issues updated publication on debt cancellation.
- Franchise Tax Board audits Section 1031 exchanges.
- Financial Insider Weekly broadcast schedule.
- Do you have real estate questions?
- Follow me on Twitter, Facebook and LinkedIn!
- Do you know about our other newsletters?
- Check out my blog.
- Subscribe/Remove from Michael Gray, CPA's Real Estate Tax Letter
- IRS Circular 230 Disclosure
Tax season is here! Make your appointment now!
There are only about two and one-half months left before the tax return due date. Time to get started now!
If we prepared your income tax returns last year, you should have already received instructions in the mail. If you haven’t, please call Dawn Siemer at 408-918-3162.
To have us prepare your income tax returns, start with the online Tax Notebook organizer. Call Dawn Siemer at 408-918-3162 for instructions to get started. We also have a paper organizer, if you prefer. We still need your documents (W-2s, 1099s, receipts for donations) to prepare your income tax returns.
We have a secure internet portal for sending documents. Email Dawn Siemer at dgsiemer@taxtrimmers.com for instructions.
We can prepare most income tax returns using information provided online and by mail. If you wish a personal meeting, please call Dawn Siemer at 408-918-3162 to schedule an appointment. Our calendar is filling up fast!
W-2s, 1099s and DE 542 reminder.
Remember that most 2011 annual information returns, such as W-2s and 1099s, should be sent to the tax authorities by February 29. (Payments made using a credit card are no longer required to be reported on Form 1099.)
Some California businesses are required to file use tax returns.
California businesses that reported more than $100,000 in gross receipts from a business or rental property on their 2011 federal income tax returns and that don't file sales tax returns are required to electronically file a California use tax return for 2011. Businesses that registered with the State Board of Equalization last year should also file. Some businesses that reported no transactions for three years no longer need to file. The use tax returns and tax payments are due April 15, 2012. A use tax return must be filed even if there is no tax due.
Schedule D (Capital Gains and Losses) radically changed for 2011 individual income tax returns.
The IRS has issued a changed Form 1040, Schedule D and new Form 8949 for 2011. The forms are totally redesigned to accommodate information about the tax basis (cost to for tax gain or loss) of securities sold that is being reported by securities brokerage companies for securities purchased in 2011 forward. The forms require disclosure of adjustments to the reported cost and have many special codes.
The tax basis reported by the securities brokerage company will occasionally be wrong and can be adjusted at column (g) of Form 8949.
Separate Forms 8949 must be prepared with boxes checked for sales reported on Form 1099-B with basis reported to the IRS, sales reported on Form 1099-B without basis reported to the IRS, and other sales.
In the past, the sale of a residence for which the gain was excluded wasn’t reported on Schedule D. Now it’s reported on Form 8949 with the exclusion entered as a negative number in column (g) and code "H" in column (b).
This form is sure to create headaches for 2011 income tax returns. Read the instructions carefully, even if you are providing information to a tax return preparer. You can find them under "forms and publications" at www.irs.gov.
IRS Chief Counsel says "any reasonable method" may be used for mortgage interest deduction limits.
The IRS Chief Counsel has said that “any reasonable method” may be used by a taxpayer to determine the amount of interest deductible for a home mortgage under the $1 million and $100,000 limitations.
Under the "simplified method," the interest paid for mortgages that otherwise qualify is multiplied by a fraction equal to the debt limits divided by the sum of all the secured debts.
A taxpayer may alternatively use an "exact method," multiplying the otherwise qualifying interest paid by a fraction equal to the debt limit for the debt, divided by the average balance of the debt.
A hybrid method may also be used. That method is described in Publication 936, Home Mortgage Interest Deduction. You can get the publication under "forms and publications" at www.irs.gov.
(CCA 201201017.)
Taxpayer couldn’t change an agreed cost allocation with a later cost segregation study.
Peco Foods acquired two poultry processing plants during 1995 and 1998. The purchase documents included allocations of the purchase price that were agreed on by the buyer and sellers "for all purposes, including financial accounting and tax purposes".
During or about 1999, Peco hired a company to perform a cost segregation study of these plants. Under the new allocation, Peco would be entitled to $5,258,754 of additional depreciation for 1998 through 2001.
The Tax Court upheld the IRS in finding the allocations in the purchase agreements were binding and couldn’t be superceded by the later cost segregation study. Congress adopted Internal Revenue Code Section 1060 for the buyer and seller to treat an acquisition consistently and to avoid having the IRS be "whipsawed" by different claimed allocations of the purchase price. (The gain for the seller could be capital gain or ordinary income, depending on the types of assets sold.)
This case provides an opening for the IRS to challenge changes in depreciation schedules based on cost allocation studies. It’s best to have the study done at the time of the purchase.
(Peco Foods, Inc., T.C. Memo 2012-18, January 17, 2012.)
IRS issues updated publication on debt cancellation
The IRS has issued an updated Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments (for individuals). If you are dealing with one of these transactions, you should get a copy and study it. You can get a copy for free at www.irs.gov under "forms and publications."
Franchise Tax Board audits Section 1031 exchanges.
The Franchise Tax Board listed tax audit issues relating to Section 1031 exchanges in the January 2012 issue of Tax News.
Here is the list:
- Sourcing of gains to California when the replacement property received in a California tax-deferred exchange is sold.
- Taxable gain not reported for non-like kind property (boot) received.
- The technical requirements, including identification and closing deadline, aren’t met to qualify for a Section 1031 exchange.
- The replacement property doesn’t qualify for a Section 1031 exchange because it’s not held for investment or productive use in a trade or business. For example, the property received may be used for a personal residence or it may be held for immediate resale.
- The taxpayer who transfers relinquished property is a different taxpayer than the party who acquires replacement property.
(Tax News, January, 2012, page 6.)
Financial Insider Weekly broadcast schedule for February and March.
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 the rest of February and March:
- 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"
- March 2, 2012, Lamarr Baxter, The Entrust Group, "Investing in real estate using your Roth or IRA account"
- March 9, 2012, Lamarr Baxter, The Entrust Group, "Making alternative investments besides real estate using your Roth or IRA account"
- March 16, 2012, Alan L. Nobler, attorney at law, "How a collaborative team can help preserve your legacy"
- March 23, 2012, Raymond Sheffield, attorney, Sheffield Law Office, "Estate and gift tax problems for a non-citizen spouse"
- March 30, 2012, Raymond Sheffield, attorney, Sheffield Law Office, "Estate planning for retirement accounts"
Financial Insider Weekly is also broadcast as follows:
- Sunday at 5:30 a.m. on Comcast Channel 27 in Santa Cruz County and on Charter Communications Channel 73 in Watsonville and Capitola
- Monday at 3:30 p.m.on Comcast Channel 27 in Santa Cruz County and on Charter Communications Channel 73 in Watsonville and Capitola
- Monday at 4 p.m. and 7 p.m. Pacific Time on cable channel 19 in Morgan Hill. Broadcast on the internet at the same time as streaming video at www.mhat.tv.
- Monday at 7:30 p.m. on Comcast channel 15 in Saratoga
- Tuesday at 4 p.m. and 7 p.m. Pacific Time on cable channel 19 in Morgan Hill. Broadcast on the internet at the same time as streaming video at www.mhat.tv.
- Tuesday at 9:00 p.m. on Comcast channel 26 and AT&T U-verse channel 99 in Marin County
- Wednesday at 8 p.m. on Comcast channel 28 in Hayward, Alameda and Fremont and on AT&T U-Verse Channel 99, Hayward public access TV 28 in California
- Thursday at 5:30 p.m. on Comcast channel 27 in Santa Cruz County and Charter Communications channel 73 in Capitola and Watsonville
- Friday at 4 p.m. on cable channel 15 in Cupertino, Los Altos and Mountain View
- Friday at 4:30 p.m. on Comcast channel 15 in Los Gatos
- Friday at 6:00 p.m. on Comcast and Astound channel 29 in San Francisco. Online streaming video at www.bavc.org, "public access TV"
- Friday at 8:00 p.m. on Comcast channel 28 in Hayward, Alameda and Fremont and on AT&T U-Verse Channel 99, Hayward public access TV 28 in California
- Saturdays at 12:30 p.m. on Comcast channel 27 in Santa Cruz County and on Charter Communications Channel 73 in Watsonville and Capitola
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!
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.
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