Michael Gray, CPA's

Real Estate Tax Letter

March 11, 2013

© 2013 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 season is here! Make your tax preparation appointment now.

If you would like to schedule an appointment for a tax preparation interview, please call Dawn Siemer on a Monday, Wednesday or Friday at 408-918-3162. (Appointments are generally scheduled on Tuesdays and Thursdays.)

We will do our best to have tax returns submitted to us by March 15 completed by April 15. We will probably apply to extend the due dates for any tax returns for which we receive the information after March 15.

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IRS efiling delayed for some tax returns.

IRS efiling programming has been delayed for several forms. The IRS says it should be able to process most of them by the end of this week. The software vendors will also have to update their software to process the forms for efiling. Unfortunately that will delay completing the tax returns and delivering them to clients.

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Unhappy results from late filing of income tax returns.

I have been having some new clients coming to me to catch up on filing late income tax returns, and also have some continuing clients who have gotten behind.

Be aware that the IRS and Franchise Tax Board can prepare income tax returns for you, called a Substitute For Return. Although you can amend a Substitute For Return, any tax due for that year can’t be discharged in bankruptcy.

Also, when a tax return is more than two years late, you lose any refund that you may be entitled to.

Avoid being late with your tax return filing. It leads to continuing to be late in future years, and is a very bad habit.

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Calendar year corporation due date is March 15.

Remember the due date for income tax returns for 2012 calendar-year corporations is March 15, 2013. If you haven’t done it already, get your corporate tax information to your tax return preparer now, so that at least an extension can be done. Remember, there is no extension for paying the tax.

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Remember the second California real estate tax payment is due April 10.

There is a nasty penalty for late payment, and the due date is weird.

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Amended returns deadlines.

Sometimes corrections need to be made for tax returns that have already been filed. For example, a refundable minimum tax credit may have been missed. Another example is a taxpayer may wish to make a claim for a refund for an aggressive tax position with limited time for the tax authorities to raise other issues.

The deadline for filing an amended return for a 2009 federal individual income tax return filed by April 15, 2010 is April 15, 2013. The California deadline is one year later, April 15, 2014. (So amended 2008 California individual income tax returns are due April 15, 2013.)

The deadline for a 2009 federal corporate income tax return filed by March 15, 2010 is March 15, 2013. The California deadline is one year later, March 15, 2014. (So amended calendar year 2008 California corporate income tax returns are due March 15, 2013.)

Tax season is a hard time for working on amended income tax returns, but sometimes it’s necessary. If you think you might need an amended income tax return prepared, tell your tax return preparer now.

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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 2012 federal income tax returns and that don't file sales tax returns are required to electronically file a California use tax return for 2012. Businesses that previously registered with the State Board of Equalization should also file, unless notified otherwise. 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, 2013. A use tax return must be filed even if there is no tax due.

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Reporting guidelines issued for HAMP.

The IRS has issued Revenue Procedure 2013-16 about how taxpayers should report relief under the federal Home Affordable Modification Program (HAMP).

The highlights of the Procedure are that incentive payments to the loan holder relating to a principal residence are excluded from federal taxation under the general welfare exclusion.

Principal reduction under HAMP is cancellation of indebtedness income. The debt cancellation may qualify for exclusion under the rules for qualified residential housing indebtedness or insolvency.

If the debt cancellation doesn’t qualify for exclusion, it may be taxable over a three-year period. If the loan is paid off, the taxation of the balance of the debt cancellation income will be accelerated.

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Classification of residential mortgage interest as investment interest expense disallowed.

The Tax Court found that taxpayers couldn’t deduct residential housing interest in excess of the limitations for such interest as investment interest expense. The taxpayers weren’t able to substantiate an allocation of the mortgage to investment expenses.

(Norman v. Commissioner, TC Memo. 2012-30.)

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Deduction disallowed when interest was added to mortgage balance.

The Tax Court found that a cash-basis taxpayer couldn’t currently deduct residential housing interest when the interest expense wasn’t paid during the taxable year but was added to the balance of the mortgage.

(Smoker, TC Memo. 2013-56.)

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California enacts LLC failure to file penalty.

Effective January 1, 2013, the California Franchise Tax Board will begin imposing a $2,000 failure to file penalty for foreign or suspended LLCs that fail to file a tax return.

The penalty will apply for all taxable years when the Franchise Tax Board issues Notice and Demand letter on or after January 1, 2013.

An out-of state LLC will be presumed to be doing business in California when the single member/owner is a California resident.

This penalty is an incentive to file final LLC tax returns when an LLC has liquidated or is no longer doing business in California.

(Revenue and Taxation Code Section 19135, AB 318 (Ch. 12-313), Spidell’s California Taxletter®, February, 2013, page 3.)

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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 experiences that you have had with our firm. Some of the sites where you can share your experiences include yelp.com, siliconvalley.citysearch.com, and Google+.

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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 March and April.

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 March and April:

March 15, 2013, attorney Bernard Vogel III, Silicon Valley Law Group, “Alternative forms for businesses”
March 22, 2013, attorney Michael W. Malter, Binder & Malter, LLP, “What you should know about bankruptcy for individuals”
March 29, 2013, Tom W. Anderson, President, Retirement Industry Trust Association, “How to invest in real estate using your Roth or IRA account”
April 5, 2013, Tom W. Anderson, President, Retirement Industry Trust Association, “How to make alternative investments besides real estate in your Roth or IRA account”
April 12, 2013, Michael Jones, CPA, Thompson Jones LLP, “Community property issues for retirement accounts”
April 19, 2013, attorney Jeffrey Hare, APC, “How to settle legal disputes out of court”
April 26, 2013, attorney Jeffrey Hare, APC, “Using a checkbook LLC to invest Roth & IRA funds”

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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Question and Answer

Question

House went available for rent in June of 2012. Couldn’t find a tenant. Can I still use the tax advantages to recoup some of what I spent for improvements and repairs to get it ready to rent?

Answer

Rental expenses start being deductible when the house is vacant and advertised as available for rent.

Get a copy of Publication 527 at the IRS web site, www.irs.gov, or you can call the IRS and they’ll mail it to you.

The improvements might have to be capitalized, and repairs before rental may be start-up costs subject to special rules.

Rental losses are also subject to limitations under the passive activity loss rules.

I suggest that you get professional help preparing your income tax returns at least for the first year for which you claim rental expenses and depreciation.

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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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