Michael Gray, CPA's

Real Estate Tax Letter

September 4, 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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Tax planning thoughts.

There are some tax plans that take time to implement, such as making a short sale before the end of the year or making a gift of a family partnership interest requiring an appraisal. Now is the time to discuss what actions might be appropriate before the end of 2012.

This is the most difficult year for tax planning that I can remember. I have never seen so many changes that will happen if Congress doesn’t take action, and I can’t imagine that not happening. Nobody knows what the final answers will be, most of which may not be enacted until late next year.

Meanwhile, there are some significant tax benefits to exploit before the year end (like the 15% maximum tax rate for long-term capital gains and the $5 million exemption for gifts and generation-skipping tax) and to avoid for next year (like the Medicare tax on investment income.)

Call Michele Brantley at 408-918-3162 on Wednesdays from 8:30 a.m. to 5:30 p.m. to schedule a tax planning meeting with Michael Gray before his calendar is full

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It’s time for 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 Michele Brantley on Wednesdays from 8:30 a.m. to 5:30 p.m. Pacific Time to make an appointment. Michele’s telephone number is 408-918-3162.

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New book about investing using Roths and IRAs to be released this month.

How to use Roth and IRA accounts to provide a secure retirement, - 2012 Edition by Michael Gray, CPA will be released this month. For the month of September, 2012, you can buy it for half price - $14.99, plus shipping and handling and applicable California sales tax. Click here to see order form. The book is 76 pages, and is packed with insights, including Roth Conversions, a comparison of Roth to regular IRA accounts, self-directed accounts, alternative investments, prohibited transactions, when Roth and IRAs pay income taxes and much more.

You can also get a Kindle version of the book at Amazon.com. Search “How to use Roth and IRA accounts”. Eventually a Nook version of the book will be listed at bn.com.

After you read the book, please post a book review at Amazon.com and bn.com.

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Extended due date for calendar year tax returns for businesses, estates and trusts is September 17.

Since September 15 falls on Saturday this year, the extended due date for calendar year corporations, partnerships, estates and trusts is September 17.

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Third quarter, 2012 estimated tax payment due date is September 17.

The next federal estimated tax payment for individuals and calendar-year corporations is September 17. In most cases, California doesn’t require an estimated tax payment for September 17 because the first two estimated tax payments are front-loaded.

If your estimated tax payments aren’t based on last year’s income tax returns, you should be working with your tax advisor to annualize your tax liability.

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Deadline approaches for IRA or Roth of 2011 decedents.

The deadline for having beneficiaries set up for inherited IRAs is September 30 of the year after death. Benefits should be paid out to non-individual beneficiaries like charities by this date. You might be able to divide an account into separate accounts for individual beneficiaries to receive distributions over their individual life expectancies. See your tax advisor for details.

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Tax break for cancellation of debt for residential mortgage will expire soon.

Unless Congress takes action, the exclusion for cancellation of debt relating to a principal residence will expire after 2012. For more details, see this article: http://www.realestateinvestingtax.com/shortsale.shtml.

You have more control over the closing date for a short sale (if you can find a buyer) than for a foreclosure. With a foreclosure, the lender controls when the foreclosure takes place.

If you want to use this tax benefit, you should be working on your short sale now.

Call or write your representatives in Congress to extend this tax break. There are still many homeowners wrestling with underwater mortgages.

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Vineyard qualifies for expense election.

The IRS Chief Counsel says that vineyards planted in 2005 and placed in service in 2009 are eligible for the expense election under Internal Revenue Code Section 179. The taxpayers could expense the cost of the vineyard in 2009, including capital expenditures for developing the vineyard to the stage when it was capable of producing income.

(CCA 201234024.)

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Loss from one passive activity not deductible against recharacterized income from another one.

A taxpayer owned a C corporation trucking company and two passthrough leasing companies. One of the leasing companies was a single-member LLC and the other was an S corporation 99% owned by the taxpayer. The leasing companies leased tractors and trailers to the trucking business.

One of the leasing companies operated at a profit and the other at a loss. He classified both of them as passive activities on his individual income tax return, and deducted the losses of one against the profits of the other.

Under the passive activity regulations, the net income from a passive activity for a rental to a business controlled by the taxpayer is non-passive. The taxpayer said that both rental operations should be treated as one “item of property” activity.

The Tax Court upheld the IRS position that the rental of each tractor and trailer was a separate “item of property” to be evaluated under the passive activity rules, and that the income for any trucks that generated a profit should be recharacterized as non-passive. (Ouch!)

The Court pointed out that the regulations explicitly recharacterize as nonpassive net rental activity income from an “item of property”, not net income from an entire rental “activity”.

This ruling will create an accounting nightmare for many of these leasing businesses, which are commonly set up for equipment to be used in a C corporation.

The main reason that I am discussing this case in this newsletter is that individuals often lease buildings to C corporations that they own. They may have net income from leasing some of the buildings, and net losses for others. Be aware the income from the profitable leases will be recharacterized as non-passive, so the losses from the unprofitable leases won’t be deductible against that income.

(Joseph Veriha and Christina F. Veriha v. Commissioner, 139 T.C. No. 3, August 8, 2012.)

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No close of escrow date may result in California penalty

California requires withholding of California income tax on sales or transfers of California real estate when the total sale price exceeds $100,000 unless an exemption applies.

The withholding is reported using Franchise Tax Board Form 593.

The withholding is due to be paid by the 20th of the month following the month escrow closes. When no date is entered on line 2 of Form 593, the Franchise Tax Board uses a default date of January 1 of the tax year in which Form 593 is received.

The penalty is $15 if filed 1 to 30 days after the due date; $30 if filed 31 days to six months after the due date; or $50 if filed more than 6 months after the due date. If the form is late due to an intentional disregard of the requirements, the penalty increases to the greater of $100 or 10% of the required withholding.

See FTB Publication 1016, Real Estate Withholding Guidelines, for more details.

(Franchise Tax Board taxnews, September, 2012, page 4.)

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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 July and August.

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 September and October:

September 7, 2012, Dick Blakeley, RIA, The Blakely Group, Inc., "A financial planning case study"
September 14, 2012, Craig Martin, CFP®, The Family Wealth Consulting Group, "Investing basics"
September 21, 2012, Craig Martin, CFP®, The Family Wealth Consulting Group, "Alternative investments besides stocks and bonds"
September 28, 2012, Gregory Carpenter, BTI Group Merges & Acquisitions, "Preparing to sell a business"
October 5, 2012, Peter Moss, Wymac Capital, Inc., "Big picture strategies for the home mortgage marketplace"
October 12, 2012, Lori Greymont, CEO, Summit Assets Group, "Real estate investment opportunities in Atlanta"
October 19, 2012, Lori Greymont, CEO, Summit Assets Group, "Different ways to invest in real estate"
October 26, 2012, Naomi Comfort, attorney, Silicon Valley Elder Law P.C., "The role of financial capacity in elder law"

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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.

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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?

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Check out my blog.

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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