Michael Gray, CPA's

Real Estate Tax Letter

April 30, 2012

© 2012 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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It’s time for tax planning and working on amended, extended and late income tax returns.

Now that April 17 has passed, people are calling wanting a second look at the income tax returns that were filed for possible amended income tax returns. Taxpayers who filed extensions are also looking for help income getting their tax returns done.

If you would like our help, call Dawn Siemer on Mondays, Wednesdays and Fridays from 9 a.m. to 5:30 p.m. Pacific Time to make an appointment. Dawn’s telephone number is 408-918-3162.

See below about when I will be available.

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Bon voyage!

Janet and I will be on a vacation Panama Canal cruise starting April 28 and returning May 14. I won’t be checking email or voice messages during our vacation. Call Dawn Siemer to make an appointment to see me when I return.

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Roth IRA can't be an S corp shareholder.

The Ninth Circuit Court of Appeals has affirmed a Tax Court decision that a Roth IRA was not an eligible shareholder for an S corporation. The decision follows Revenue Ruling 92-73, which held that a trust qualifying as an IRA isn’t a permitted S corporation shareholder.

(Taproot Administrative Services, Inc., 2012-1 U.S.T.C. ¶ 50,256 (March 26, 2012).)

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Tax Court partially disallows cost-segregation study.

Ruel Hamilton formed AmeriSouth Texas XXII, Ltd. to buy an apartment complex in 2003. Amerisouth hired MS Consultants to do a cost-segregation study.

The IRS challenged the allocation and said some items for which five and fifteen year lives were claimed were actually depreciable over 27.5 years, and some weren’t depreciable at all.

Strangely, Amerisouth stopped responding on the case and its attorneys withdrew from representing the company. Amerisouth, representing itself, didn’t show up for the hearing.

The Tax Court said it could have dismissed the case entirely. It generously allowed many of the allocated items, but held that site preparation and earthwork were nondeductible land costs, not depreciable "land improvements." Amerisouth didn’t present evidence whether some of the cost should have been depreciable, such as for sidewalks.

The Court allowed depreciation of outlets for washing machines and dryers as five-year personal property.

The water distribution system attributable to the overall operation and maintenance of the building were held to be depreciable over 27.5 years as part of the structure, not 15 years as claimed by the taxpayer.

Clothes dryer vents were held to serve specific equipment – the dryers, and therefore depreciable over five years.

Vent hoods over the stoves were held to be structural components of the building, depreciable over 27.5 years.

The Court made more determinations, which you can study on your own.

AmeriSouth probably would have had a better result if it had legal counsel and actively defended its case. The result that it got wasn’t horrific, and it could have been.

(Amerisouth XXXII, Ltd. V. Commissioner, T.C. Memo. 2012-67 (March 12, 2012).)

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Home mortgage interest deduction partially allowed.

Conrad Edosada bought a home with his parents for $2,150,000 on October 5, 2005. He contributed $70,000 of the $570,000 downpayment and agreed to be responsible for the mortgage payments. He moved into the house and deducted interest for $67,003 of mortgage payments made during 2007. He was deeded a small percentage of the property on December 3, 2007.

The IRS issued a notice of deficiency, disallowing the residential mortgage interest deduction.

The Tax Court held that Conrad had equitable ownership in the home since he occupied it, contributed to the downpayment and made mortgage payments. However, his deduction is limited to interest on $1,100,000 of the mortgage with an average principal balance during 2007 of $1,663,410.90.

I don’t recommend this structure for buying family homes. Conrad Edosada was fortunate to get this favorable result. Of course, he had to go to Tax Court to defend it.

(Conrad Y. Edosada v. Commissioner, T. C. Summary Opinion 2012-17 (February 29, 2012).)

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California backs off real estate tax deduction issue.

After the IRS issued IRS Information Letter 2012-0018, indicating that real estate taxes don’t have to be ad valorem taxes to be tax deductible, the California Franchise Tax Board backed off its position of disallowing deductions for most special assessments, and will not require special disclosure relating to disclosing parcel numbers on the 2012 California income tax return. Unfortunately, these announcements happened right at the end of tax season. It’s probably not worth the hassle of filing an amended return to claim an additional deduction.

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Want to make federal tax payments on the internet?

More people are seeking the convenience of making federal tax payments on the internet. It takes some lead time to get it set up. For details, see my article on the subject at www.taxtrimmers.com/payments.shtml.

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New IRS instructions are issued for automatic change of accounting for new repair regulations.

The IRS has issued new instructions for Form 3115, Application for Change of Accounting Method. The instructions cover automatic accounting changes under the new regulations for repairs under Revenue Procedures 2012-19 and 2012-20. If you have a business or rental properties, you should discuss whether to file for a change of method under the new regulations.

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Financial Insider Weekly broadcast schedule for May and June.

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 May and June:

May 4, 2012, Jann Besson, attorney, Besson and Yarbrough, "Using Medi-CAL benefits for long-term care"
May 11, 2012, William Mahan, attorney, "Mechanics of short sales and foreclosures"
May 18, 2012, William Mahan, attorney, "Tax considerations of short sales and foreclosures"
May 25, 2012, Don Pollard, CLU, ChFC, Advanced Professionals, "Health insurance alternatives for individuals"
June 1, 2012, Don Pollard, CLU, ChFC, Advanced Professionals, "Group medical insurance for small businesses"
June 8, 2012, Michael Desmarais, attorney, "Your rights as a beneficiary"
June 15, 2012, Janis Carney, attorney, Carney, Sugai & Sudweeks, LLP, "Life care planning"
June 22, 2012, Jan is Carney, attorney, Carney, Sugai & Sudweeks, LLP, "Veteran’s Administration benefits for long-term care"
June 29, 2012, Peggy Martin, CLU, ChFC, MSFS, The Family Wealth Consulting Group, "Long-term care insurance"

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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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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Follow me on Twitter, Facebook, LinkedIn and Google+!

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, LinkedIn, and Google+.

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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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I have also started a blog at 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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