Michael Gray, CPA's

Real Estate Tax Letter

December 7, 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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Happy Holidays!

We hope you and your family enjoy a happy and safe holiday season, and that 2013 will be a healty and prosperous year for you.

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Our holiday schedule.

Our office will be closed December 24, 25 and New Year's Day. Dawn Siemer will be on vacation for the last week in December.

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It's time for year-end tax planning.

With the holidays and continuing education classes in preparation for tax season, Michael Gray will have very limited availability for year-end tax planning meetings. Reserve your appointment now by calling Dawn Siemer on Mondays, Wednesdays and Fridays at 408-918-3162. Call Michael Gray directly on the days he is in the office after December 25 at 408-918-3161.

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Give generously to help disaster victims in the Eastern U.S.

According to news broadcasts, Hurricane Sandy has inflicted devastating storm damage in the eastern U.S., particularly in Jersey Shore and New York City. Please give generously to the American Red Cross or your favorite relief organization to provide relief to victims of this disaster.

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Michael Gray is interviewed on "Real Estate 360".

A one-hour radio interview of Michael Gray, mostly about investing using Roth and IRA accounts, by Lori Greymont on the "Real Estate 360" radio show will be broadcast on KDOW, 1220 AM, next Thursday, December 13 at 3 p.m. Pacific Time. KDOW is broadcast from Palo Alto, and can be heard throughout the San Francisco Bay area, and is also broadcast online at www.kdow.biz.

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Michael Gray quoted in San Jose Mercury News.

Michael Gray was quoted in the page one San Jose Mercury News article, "Coveted tax break in peril?" on Wednesday, November 28, 2012. The article was about a federal proposal to reduce the mortgage interest deduction.

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Please share your good experiences with Michael Gray, CPA.

As you know, more and more people are going to the internet to find information about service providers. We hope you will share some good words about good experiences that you have had with our firm. Some of the sites where you can share your experiences include www.yelp.com/biz/michael-gray-cpa-san-jose, siliconvalley.citysearch.com/profile/1120104/san_jose_ca/michael_gray_c_p_a_.html, and Google+ at https://plus.google.com/104281496380131294416/about?gl=us&hl=en.

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"Fiscal cliff" directs more attention to year-end tax planning.

Most of us know the Bush federal tax cuts are scheduled to expire after 2012. In addition, a "patch" for the minimum tax exemption hasn't been enacted for 2012, potentially exposing millions of taxpayers to an alternative minimum tax liability. Congress has made little progress since the election to solve these problems. As a result, unusual tax strategies are being examined, including considering accelerating income to 2012 and selling investments to report long-term capital gains in 2012. Also, individuals with large estates are aggressively making gifts in 2012. Consider discussing these issues with your tax advisor.

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Fourth quarter calendar year corporate estimated tax payment is due December 17.

The final 2012 estimated tax payment for calendar-year corporations is due December 17, 2012. Not all corporations can base their federal estimated tax payments on the previous year's income tax return. For example, new corporations and corporations that had no tax liability for the previous year must compute their estimated tax using the current year's facts. See your tax advisor for assistance.

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Fourth quarter estimated tax payment for non-corporate taxpayers is due January 15.

The final estimated tax payment for individuals and calendar-year estates and trusts is due January 15, 2013. Remember California taxpayers with taxable income of $1 million or more must pay their estimated taxes using the current year's facts. California passed a retroactive tax increase in the last election. There is no penalty for not paying the additional tax with your 2012 estimated tax payments, but you might want to do it for a deduction on your 2012 federal income tax return. Watch the alternative minimum tax. See your tax advisor.

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First property tax payment is due.

The first property tax payment for the 2011-2012 fiscal year in Santa Clara County is due December 10. Avoid a late payment penalty – mail your payment early!

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California passes individual tax increase.

California's Proposition 30 passed in the November election. The proposition included a ¼% sales tax increase effective January 1, 2013 and expiring after December 31, 2016.

A privileged few will be affected by changes in the income tax rates, retroactively effective January 1, 2012 and expiring after December 31, 2018. Tax rate increases apply for singles and married persons filing separately with taxable income over $250,000, heads of household with taxable income over $340,000 and married persons filing joint returns with taxable income over $500,000.

For more details, see my blog post, "Will your taxes be changed by California Proposition 30?" at michaelgraycpa.com/2012/11/08/will-your-taxes-be-changed-by-california-proposition-30/.

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Some multiple-state businesses will pay more income taxes under California Proposition 39.

California passed Proposition 39 in the November election. Under this proposition, businesses headquartered outside California will probably pay more income taxes, but the method for computing California income taxes for some California businesses may change, too.

For more details, see my blog post, "How will businesses be affected by California's Proposition 39?" at michaelgraycpa.com/2012/11/09/how-will-businesses-be-affected-by-californias-proposition-39/.

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California changes non-recourse rules for refinancing.

Governor Brown approved Senate Bill 1069 on July 9, 2012. Effective January 1, 2013, a refinancing for a California dwelling for not more than four families occupied entirely or in part by the purchaser will still be nonrecourse for the portion of the loan principal refinanced that was a purchase money mortgage.

For example, Sally Smith bought a home in 2010 for $500,000, for which she borrowed $400,000 on a mortgage secured by the home. On February 1, 2013, she refinances the mortgage, with a current balance of $395,000, and replaces it with a new mortgage for $450,000. $395,000 of the new mortgage is nonrecourse, and $55,000 of the new mortgage is recourse.

"Nonrecourse" means the lender can only look to the residence for recovery of the principal in the event of default. The tax result is explained in my article, "Tax consequences of a "short sale" of real estate v. foreclosure" at www.realestateinvestingtax.com/shortsale.shtml, soon to be updated.

It's unclear whether the new rule will apply for subsequent refinancings or can only be applied once.

We recommend that you always consult with a real estate attorney when planning a short sale or foreclosure.

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IRS postpones new repair and capitalization rules.

The effective date of new repair and capitalization rules, that will also make significant changes in depreciation rules relating to replacements of items like roofs on buildings, is being delayed by the IRS until taxable years beginning on or after January 1, 2014. The IRS expects to issue final regulations during 2013, which will replace temporary regulations that were issued December 23, 2011. Several changes will be made in the final regulations in response to comments received relating to the temporary regulations. Taxpayers will be able to elect to apply the final regulations for taxable years beginning on or after January 1, 2012 or 2013. Here is a link to a blog post on this subject: http://michaelgraycpa.com/2012/10/31/new-irs-rules-for-repairs-depreciation-materials-supplies/.

(Notice 2012-73, November 20, 2012.)

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Exchange accommodator allowed to serve related taxpayers.

The IRS ruled that an exchange accommodator may serve as an intermediary for two related taxpayers for reverse exchanges where both taxpayers identified the same property as potential replacement property in Section 1031 tax-deferred exchanges.

(Letter Ruling 201242003, July 12, 2012.)

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Real estate losses were passive, says Appeals Court.

In an unpublished decision, the Eleventh Circuit Court of Appeals upheld the Tax Court in finding real estate losses were subject to the passive activity loss rules and weren't currently deductible. The taxpayers claimed they were real estate professionals, so the passive activity loss rules shouldn't apply. They weren't able to satisfy the Tax Court and the Court of Appeals that they performed more than 750 hours per year in the real estate business.

(Harnett, 2012-2 U.S.T.C. ¶50,665, November 14, 2012.)

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Time to make year-end related party payments for certain calendar year corporations & pass-through entities.

In order to take current tax deductions for payments by accrual-basis businesses to cash-basis related parties for wages, interest and rent, the payments should be made by the year-end of the entity. For a calendar-year entity, that's December 31. The limitation applies to owners who control C corporations, owners of 2% of S corporations, partners of partnerships, members of LLCs and certain members of the owners' families.

If you have any questions about this issue, consult with your tax advisor.

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Have you taken your required distribution from your retirement account or IRA for 2012?

Remember that account owners who are over age 70 ½ generally must take a required minimum distribution by December 31. There is an exception permitting a distribution by April 10 of the next year for the first year a distribution is required. There is another exception for certain non-controlling employees who keep working after age 70 ½. The penalty for missing the distribution is severe. If you have questions, see your tax advisor.

Annual distributions are also required for inherited retirement and IRA accounts, including Roth accounts.

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IRS lets taxpayer defer gain for involuntary conversion.

A taxpayer's home was destroyed in a presidentially declared disaster. He received insurance proceeds for the loss and replaced the former residence with a new one including moving into the replacement residence, but didn't report the details as required. The IRS ruled the taxpayer should file amended returns for the year of replacement to report the details, and the gain from the involuntary conversion would be deferred according to Internal Revenue Code Section 1033.

(Letter ruling 201240006, July 5, 2012.)

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Remember to "reset" payroll on January 1.

Software providers will issue updates including the new payroll tax tables as of January 1, 2013. Be sure you have installed those updates before processing your first payroll for 2013.

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Should you make additional tax payments before December 31?

State estimated tax payments and early property tax payments made by December 31 are generally tax deductible for the regular tax. However, many people are finding they are subject to the alternative minimum tax. Deductions for taxes (and miscellaneous itemized deductions) aren't allowed for the alternative minimum tax, so there could be no benefit for a tax prepayment. A tax advisor can project your tax picture to determine if the AMT will apply. Turbo Tax and other tax preparation software can also be used to make the computations.

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Should you donate appreciated publicly traded stock?

It's the season for giving. Many of us make extra donations during December to share our bounty with others. Appreciated publicly-traded stock that has been held for more than a year is an ideal asset for a donation. Under the Internal Revenue Code, the long-term capital gain is excluded from taxable income and the charitable contribution deduction is the fair market value of the stock, so there is a double tax benefit. Also, publicly traded stock isn't subject to the appraisal requirements that apply for other property. It's a win-win-win! Remember to get a good acknowledgement letter to document the donation, including a statement that "no goods or services were received in exchange for the donation".

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Donating a car to charity?

Remember that an appraisal is required for noncash contributions with a value exceeding $5,000. See Form 8283 and instructions as the IRS web site, http://www.irs.gov. (There is a Declaration of Appraiser on the form.) There is an exception to the rule for vehicles donated to a charity. If the charity sells the car, the taxpayer may rely on the sales price disclosed on Form 1098-C. The original Form 1098-C is submitted to the IRS with your income tax return (or otherwise sent to the IRS with Form 8453 if you efile.)

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Standard mileage rates announced for 2013.

The business standard mileage rate is being increased from 55.5¢ per mile for 2012 to 56.5¢ per mile for 2013. The standard mileage rate for medical and moving expenses is being increased from 23¢ per mile for 2012 to 24¢ per mile for 2013.

(IRS News Release IR-2012-95, Notice 2012-72.)

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Community public access television needs our help.

As you can see below, 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: www.communitymedia.se/cat/linksca.htm.

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Financial Insider Weekly broadcast schedule for November and December.

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 November and December:

December 7, 2012, William Mahan, attorney, of counsel to Gates Eisenhart Dawson, "Why you need a will"
December 14, 2012, William Mitchell, CPA, "I'm being audited by the IRS! What should I do?"
December 21, 2012, William Mitchell, CPA, "I don't agree with my IRS audit report. What should I do?"
December 28, 2012, William Mitchell, CPA, "I owe back taxes to the IRS! What should I do?"
January 4, 2013, attorney Mark Erickson, "Divorce – California style – Basics"
January 11, 2013, attorney Mark Erickson, "Divorce – California style – The Family Business"
January 18, 2013, attorney Mark Erickson, "Divorce – California style – The Family Residence"
January 25, 2013, attorney John Hopkins of Hopkins & Carley - "How to promote community giving as a family value"

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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Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter. Write mgray@taxtrimmers.com.

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Follow me on Social Media!

Want to see new episodes of Financial Insider Weekly as soon as they're posted on Youtube? Like to see Michael Gray's blog posts as soon as they're live? We post them (and more) on social media!

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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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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