Michael Gray, CPA's

Real Estate Tax Letter

June 10, 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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Second quarter 2013 estimated tax payment is due June 17.

The second 2013 estimated tax payment for individuals and calendar year corporations, estates and trusts is June 17. California requires some taxpayers to make estimated tax payments electronically, generally using Web Pay at www.ftb.ca.gov. The IRS also requires that businesses make their payments electronically, generally at www.eftps.gov.

Remember that California individuals who have gross income exceeding $1 million must compute their estimated tax based on current year taxable income.

High income taxpayers subject to the increased federal tax rates and the new tax on net investment income and who aren’t making estimated tax payments based on their 2012 income tax liability will have an especially challenging time making the computations this year, and should probably seek professional help. Even the professionals will find it difficult.

The good news is the interest rates used to compute the penalties for underpayment of estimated tax are currently very low, so the penalty shouldn’t be onerous if you do underpay the estimated tax.

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California LLC "fee" payment is due June 17.

California assesses a "fee" when LLCs doing business in California have at least $250,000 of gross income. The estimated fee payment for calendar year LLCs for 2013 is made for Form 3536 online using Web Pay at www.ftb.ca.gov and is due June 17. The fee payment is "protected" from penalties when it is for at least the fee amount on the last year’s LLC income tax return.

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Foreign account report is due June 30.

The annual Foreign Bank Account Report (FBAR), Form TD F 90-22.1, for 2012 is due June 30, 2013. The form is required for foreign bank and brokerage accounts either owned by a U.S. citizen or resident or over which a U.S. citizen or resident has signature authority. It also can apply to foreign financial accounts such as life insurance policies that have cash surrender values. The report is required when the total balances for the accounts equal or exceed $10,000. This is a separate report from your income tax return, and no extension of time to file is allowed. The penalties for failure to report are severe, and the IRS is on the war path about enforcing this reporting requirement, even though no tax may be involved.

You can get the form at the IRS web site, www.irs.gov. Next year (2014), electronic filing will probably be required for this form.

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Temporary expansion of employee classification program expires June 30, 2013.

The IRS is temporarily waiving some of the requirements that used to apply to qualify for its Voluntary (employee) Classification Settlement Program. This program enables employers who have been reporting employees as independent contractors to get in compliance with payroll reporting requirements with reduced exposure to penalties.

For example, previously an employer who had an income tax audit in process wasn’t eligible to participate in the program. Another example is employers who didn’t issue Forms 1099 to the employees weren’t eligible to participate. Until June 30, they can now.

Interested employers apply for the program using Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

For more information, see your tax advisor.

(IR-2013-23, Feb. 27, 2013.)

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Extension season is here.

If you would like us to prepare your extended 2012 income tax returns, please call Dawn Siemer Mondays, Wednesdays or Fridays from 9 a.m. to 5 p.m.

We can also prepare amended income tax returns to clean up tax returns that were previously filed.

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Attention tax professionals! Michael Gray live tax planning presentation.

Michael Gray will give a luncheon presentation to the Santa Cruz Discussion Group of the Silicon Valley, San Jose chapter of CalCPA. The title is "Income tax planning in a new tax environment." It will take place from noon to 1:30 p.m. on Thursday, June 13 at Michael’s on Main in Soquel. The investment is $20 for CalCPA members and $25 for nonmembers. For details, see the CalCPA web site resources, www.calcpa.org, local chapters or call Stephanie Stewart at 408-983-1122.

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Bought a California home in the last few years? Brace yourself!

County Assessor Larry Stone estimates that nearly a quarter of Santa Clara County homeowners will experience big property tax increases this year. The reason is the recovery of the real estate market. When the value of a home falls below the purchase price, the assessed value may be substantially reduced. When the value is recovered up to the purchase price, the assessed value can be fully restored. Average increases of 13% are projected for single family homes and 20% for condominiums. Check out your assessment notice when it arrives in the mail.

("Double-digit tax hikes for homeowners", San Jose Mercury News, June 7, 2013, page B-1.)

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HVAC units didn’t qualify for short depreciation.

The IRS Chief Counsel’s office said that HVAC (air conditioning) units located on the roof of a building used for retail sales and on pads located outside of the building weren’t qualified leasehold improvement property, eligible for 15-year depreciation. Instead, the units were non-residential real property, depreciable over 39 years. In order to be a qualified leasehold improvement, the improvement must be to the interior portion of a building which is non-residential property used for a qualified purpose.

(CCA 201310028.)

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Mexican land trusts aren’t regular trusts.

The IRS has issued formal guidance that a Mexican land trust, also called a fideicomiso, isn’t a trust under Treasury Regulation Section 301.7701-4(a). The trust has bare legal title and the owner retains control of the property, including the ability to sell or transfer it and to finance it without any interaction with the trust. The arrangement is analogized to an Illinois land trust.

This ruling should provide relief from foreign trust reporting requirements for many taxpayers. The IRS previously made a similar private ruling. A revenue ruling can be relied on by all taxpayers.

(Revenue Ruling 2013-14, June 6, 2013.)

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First-time home purchase exception not met.

A taxpayer claimed she shouldn’t be subject to the 10% additional tax on early distributions received from her qualified retirement plans because the funds were used for the purchase of a principal residence. The Tax Court found she didn’t qualify because she failed to prove she was the equitable owner of the residence. The deed listed her brother as the owner.

(Laura Ung v. Commissioner, T.C. Memo. 2013-126, May 13, 2013.)

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Taxpayer fails to substantiate real estate professional status.

The losses from real estate investments were suspended as passive activity losses because the taxpayer wasn’t able to substantiate that he met the 750-hour material participation requirement to be a qualified real estate professional. He didn’t keep contemporaneous time keeping records and had hired property managers for some of the properties. The taxpayer was retired from his previous employment as a soccer coach and professor of physical education, so there wasn’t a conflict of working less on the real estate activities than his other employment.

(Peter Hofinga and Margaret Wong v. Commissioner, T.C. Summary Opinion 2013-43, June 3, 2013.)

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IRS Appeals may receive late grouping election.

The IRS has issued guidance for making a late election to treat all interests in rental real estate as a single real estate activity, Revenue Procedure 2011-34. This election can enable an individual to meet the material participation test to be a real estate professional. The Revenue Procedure says the election should be filed at the IRS service center where his or her tax return is filed. The IRS Chief Counsel now says it’s OK to submit the election to IRS Appeals if it otherwise has authority to accept amended returns from a taxpayer.

(CCA 201321021, May 1, 2013.)

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Loan guarantees were prohibited transactions.

A company was owned by individual retirement accounts. The owners of the IRAs guaranteed a $200,000 promissory note to the seller of the business to the IRAs. The IRAs were converted to Roth accounts and the corporate stock resold.

The Tax Court found the loan guarantees were prohibited transactions. Therefore, the IRAs became disqualified and considered distributed as of the beginning of the year of disqualification. The sale of the stock by the Roth accounts was taxable.

This case illustrates the sensitivity of making alternative investments in an IRA. It should only be done with great care to avoid disqualification of the IRA and current taxation to the owner.

(Peek v. Commissioner, 140 TC No. 12.)

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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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Marin County broadcast time changes for Financial Insider Weekly.

Starting Saturday, June 15, the broadcast time for Financial Insider Weekly will change from 1:30 p.m. to 1 p.m. in Marin County. The program is broadcast on Comcast channel 26 and AT&T U-verse channel 99.

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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 14, 2013, Dick Blakeley, The Blakeley Group, Inc., "Benefits of a virtual family office"
June 21, 2013, attorney Scott Haislet, "Passive real estate loss limitations and electing to be a real estate professional"
June 28, 2013, attorney Scott Haislet, "Tax considerations for selling a principal residence"
July 5, 2013, attorney Scott Haislet, "The new federal tax on net investment income"
July 12, 2013, Dick Blakeley, The Blakely Group, Inc., "How family business meetings can help avoid financial elder abuse"
July 19, 2013, Craig Martin, CFP®, The Family Wealth Consulting Group, "Asset class investing"
July 26, 2013, Craig Martin, CFP®, The Family Wealth Consulting Group, "Investment diversification using alternative investments"

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.

For your questions about dependent exemptions, see IRS Publication 501 at www.irs.gov.

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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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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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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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