Michael Gray, CPA's

Real Estate Tax Letter

June 6, 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.

It’s time to have a second look at income tax returns that were filed for possible amended income tax returns. Taxpayers who filed extensions are also looking for help getting their income tax returns done.

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

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Second estimated tax payment is due June 15.

Remember the second 2012 estimated tax payment for most individuals, calendar year corporations, trusts, and estates is due June 15. California "front loads" 40% of the estimated tax in June for individuals and skips September.

If your estimated tax is not based on last year’s tax, you should be reviewing the amount to pay with your tax advisor for an "annualized" payment based on this year’s information.

Remember that individuals who have more than $1 million of income for 2012 aren’t eligible to base their estimated tax on last year.

Also remember that many individuals must make their California estimated tax payments using Web Pay. You can access Web Pay at www.ftb.ca.gov. We recommend that you avoid using your credit card with this service, but have your bank account electronically charged instead. There is a substantial fee for credit card payments.

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Estimated California fee payment due for LLCs.

Remember the estimated 2012 fee for calendar year LLCs doing business in California is due on June 15. The fee only applies to LLCs that have more than $250,000 of income. The payment is made using Form 3536 or online using Web Pay. California LLCs have two items to pay to the Franchise Tax Board: 1) an $800 annual tax (usually due April 15 of the applicable year) and 2) a sliding scale annual "fee" that applies when income exceeds $250,000 (usually due June 15 of the applicable year). See your tax advisor for assistance with this matter.

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Offshore account report is due June 30.

An annual report is required for offshore bank and brokerage accounts with combined balances at any time during the previous year exceeding $10,000 on June 30. The report is made to the Department of the Treasury using form TD F 90-22.1. You can get the form at the IRS web site, www.irs.gov. It is a separate report, not included with your federal income tax return. You may even be required to file a report even if you don’t own an account, such as if you have signature authority as a corporate officer, executor or trustee.

The penalties for not filing are severe, so if you have a question about whether you are required to report, consult with a tax advisor. The "secret" Swiss bank account is a relic of the past.

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Supreme Court decides against IRS on statute of limitations question when basis is understated.

The Supreme Court upheld the Fourth Circuit Court of Appeals in finding that a taxpayer did not under-report its income by more than 25% when it reported the gross receipts from a sale but over-reported the tax basis of the sold assets. As a result, only a three-year statute of limitations applied to a proposed deficiency, and it was assessed too late for collection by the IRS. The ruling should overturn contrary regulations subsequently enacted by the IRS. The Court said it based its ruling on a similar conclusion back in 1958 by the Supreme Court in Colony, Inc. v. Commissioner (58-2 USTC ¶ 9593, 357 U.S. 28.). The ruling related to a provision in the 1939 Internal Revenue Code that the Court said was identical.

This is a very important decision for taxpayers who reported the total sales proceeds for transactions but overstated the basis of the sold assets, resulting in understatements of the taxable gain from the transactions.

(United States v. Home Concrete & Supply, LLC et al, 2012-1 USTC ¶ 50,315 (April 25, 2012).)

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IRS loses! Tax-deferred exchange allowed when replacement home used personally.

The Tax Court ruled against the IRS and in favor of a married couple who used a replacement property received in a Section 1031 tax-deferred exchange as a personal residence.

Patrick and Jill Reesink purchased a home on November 4, 2005 as part of a tax-deferred exchange relating to the sale of an apartment building on September 23, 2005. They posted flyers advertising the property for rent and posted “for rent” signs at the property site. They negotiated with potential renters, who notified them by letter that they decided not to rent the home.

Since they were unable to rent the property and they owned two others, the Reesniks found themselves in financial difficulty. On April 6, 2006, they entered a contract to list their primary residence for sale. The sale was closed on June 30, 2006.

They moved to the property received in the tax-deferred exchange and used it as their primary residence, starting in June 2006.

The IRS asserted that, since the replacement home wasn’t used for a business purpose, the tax-deferred exchange was disqualified.

In a memorandum decision, the Tax Court ruled that the efforts of the Reesniks to rent the property after receiving it were sufficient to establish that it was business or investment property qualifying for the exchange.

This ruling can’t be cited as precedent, but is an indication of the position of the Tax Court. When you are in a pickle, it’s an indication that you have a reasonable basis to claim your exchange qualifies when you have similar facts and are economically forced to use a replacement property as a residence after trying to rent it.

(Reesink, T.C. Memo. 2012-118, April 24, 2012.)

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First-time homebuyer credit not allowed for home bought by S corporation.

The first-time homebuyer credit has expired. A married couple purchased a residence using an S corporation for which they were the only shareholders. The Tax Court upheld the IRS in finding that, in order to qualify for the credit, the residence must be personally owned by the taxpayer(s).

(Trugman, 138 TC No. 22, May 22, 2012.)

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IRS explains amortization of prepaid mortgage insurance.

The IRS has issued regulations about the amortization of prepaid mortgage insurance (PMI). Remember the deduction for PMI expired on December 31, 2011, unless Congress extends it. Also, the deduction is reduced by 10% for each $1,000 of adjusted gross income exceeding $100,000 (each $500 of AGI exceeding $50,000 for married persons filing separate income tax returns).

The PMI premium is amortized over the shorter of (1) the stated term of the mortgage or (2) 84 months.

If the mortgage is paid off early, the balance of the PMI can’t be deducted like loan fees are.

The regulations are effective January 1, 2011.

(T.D. 9588, May 7, 2012.)

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Beware of identity theft for your tax return.

More and more cases are being reported of tax refunds being delayed because someone else previously filed an income tax return with a taxpayer’s social security number. Be very careful with your birth date and social security number.

Also remember, the IRS doesn’t send notices by email or on social media sites.

Report suspected identity theft to the IRS at 800-908-4490.

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IRS Offers in Compromise relax somewhat.

Under an IRS Fresh Start Initiative, the IRS is relaxing its conditions somewhat for Offers in Compromise. Under an Offer in Compromise, the IRS agrees to accept an amount lower than the actual tax as a settlement of the balance. The IRS Fresh Start Initiative is an attempt to provide some relief to taxpayers who are suffering financial hardships due to the recession. You apply for an Offer in Compromise using Form 656 (available online at www.irs.gov).

Under the Fresh Start Initiative, the threshold for using an installment agreement without having to supply the IRS with a financial statement has been increased to $50,000.

A streamlined Offer in Compromise process is available for taxpayers with annual income up to $100,000 and tax liabilities of less than $50,000 – twice the old limit of $25,000.

When the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income for offers paid in five or fewer months, down from four years; and two years of future income for offers paid in six to 24 months, down from five years. All offers must be fully paid within 24 months of the date the offer is accepted.

The IRS is now permitted to consider the taxpayer’s credit card payments and student loans when computing the taxpayer’s living expenses.

The IRS accepted 27% of Offers in Compromise submitted in 2010 and 34% of offers in 2011.

This news offers hope to taxpayers who have been finding it difficult to pay off their obligations to the IRS.

(CCH Federal Tax Weekly, May 24, 2012, page 241, "Expanded IRS Fresh Start Initiative Revises IRS Program". CCH Standard Federal Tax Reports Taxes on Parade, May 17, 2012, page 5, "IRS Cuidance Provides Offer in Compromise Specialists With Initial Contact Procedures", IRS News Release IR-2012-53 (May 21, 2012. Also see SBSE 05-0512-045.))

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Mortgage interest deduction for married filing separate is reduced.

A taxpayer tried to claim a residential mortgage interest deduction for $1.1 million in mortgages and home equity indebtedness. The Tax Court upheld the IRS in limiting the eligible mortgage indebtedness to $550,000.

(Bronstein, 138 TC No. 21, May 18, 2012.)

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Financial Insider Weekly is broadcast in San Mateo County.

Financial Insider Weekly is now broadcast on PenTV, the public access television station for San Mateo County. The show is broadcast on Mondays and Fridays at 1:30 p.m. on Comcast channel 26 and Astound channel 27. Please tell your friends in San Mateo County!

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Community public access television needs our help.

Public access television is a vital part of our educational outreach to various communities. These are usually nonprofit, charitable organizations, like public television stations. Unlike those stations, most of the programming for the public access stations comes from local producers.

This programming includes the local arts, productions by students at local schools, community outreach by churches, independent local producers discussing current social issues, educational programming by local providers like ourselves and much more. In other words, public access television makes a unique, important contribution to the communities it serves.

With the difficult times we are experiencing, many public access stations are facing severe financial challenges, and might not survive without more community financial support. I urge you to consider making a donation to your local public access television station. Here is a link for a list of public access television stations in California: http://www.communitymedia.se/cat/linksca.htm.

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Financial Insider Weekly broadcast schedule for June and July.

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 June and July:

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, Janis 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"
July 6, 2012, David Howard, attorney, Hoge, Fenton Jones & Appel, "Information reporting requirements for foreign bank accounts and foreign trusts"
July 13, 2012, James Brown, ASA, CFP®, Perisho, Tombor, Ramirez, Filler & Brown, PC, "The role of the business valuation specialist"
July 20, 2012, Dean Fabro, Bank of the West, "Small Business Financing"
July 27, 2012, Francis Doyle, attorney, WealthPLAN, "Preserving family assets using a family limited partnership or LLC"

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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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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