Michael Gray, CPA's

Real Estate Tax Letter

September 18, 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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Extended due date for individual income tax returns is October 15.

There is less than a month left to finish 2012 individual income tax returns. 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. at (408) 918-3162. Be aware that our time for personal meetings will be very limited.

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

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Taxpayer not liable for father's income.

A father had fully extended his credit line and was unable to purchase properties to develop in his construction business. His son agreed to use his personal credit to purchase the properties on behalf of his father. The properties were sold when the title of the properties was still in the son's name.

The son didn't report the income from the sale of the properties because he bought the properties as an agent for his father's business. He never received any of the funds from the sale of the properties.

The IRS claimed the son underreported his income by more than 25% and tried to assess income tax for the transactions more than three years, but less than six years, after the tax return was filed.

The Tax Court ruled in favor of the son. They were persuaded by the testimony of the son and father and the fact that the son never received any of the funds from the transactions. Since there wasn't a substantial understatement of income, the statute of limitations for assessing tax expired three years after the tax return was filed.

This was obviously not an ideal way to structure the transactions. Somehow, the son's credit should have been used as a cosigner while the transactions were conducted in the name of the construction business. There must have been considerable expenses for litigating this issue with the IRS, which probably could have been avoided.

(Hessing v. Commissioner, T.C. Memo. 2013-179, August 5, 2013.)

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Rental losses and vehicle expenses disallowed.

Jose and Filipinas Daco owned a residential nursing home. Jose worked full time operating the nursing home, and Filipinas had two full-time nursing jobs. In addition, Jose worked as a realtor during 2008 and 2009.

The Dacos claimed real estate professional status and currently deducted losses from their four rental properties for 2008 and 2009.

The Tax Court upheld the IRS in finding the Dacos failed to substantiate that Jose spent at least 750 hours engaged in his real estate activities for the rental properties.

In addition, the deduction for the Dacos' automobile expenses for 2008 with respect to the rental properties was disallowed because they failed to provide adequate records substantiating the deduction. The Dacos didn't maintain a contemporaneous auto mileage log.

(Daco v. Commissioner, T.C. Summary Opinion 2013-71, September 9, 2013.)

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Home office deduction disallowed for motor home.

The Tax Court disallowed a home office deduction for a taxpayer's motor home. The deduction was disallowed because the taxpayer wasn't able to prove that a portion of the motor home was used primarily and exclusively as a home office.

However, the Dunfords were allowed to deduct the interest expense for secured financing relating to the purchase of the motor home as a mortgage interest deduction.

(Dunford, TC Memo. 2013-189.)

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No California principal residence cancellation of debt exclusion for 2013.

California's legislature didn't extend the exclusion for cancellation of debt on a principal residence for 2013. (The federal exclusion was extended for 2013 in the Fiscal Cliff legislation enacted last January.) Taxpayers who had cancellation of debt relating to their principal residence should look for alternative relief, such as cancellation in bankruptcy, insolvency, or a short sale or foreclosure with nonrecourse financing. Otherwise, the cancellation of debt will be taxable income.

(Spidell's Flash Email, September 16, 2013.)

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IRS provides late S election relief.

The IRS has issued consolidated simplified methods for taxpayers to request late S corporation elections in Revenue Procedure 2013-30. The guidance includes procedures for late Electing Small Business Trust elections, Qualified Subchapter S Trust elections, Qualified Subchapter S Subsidiary elections. Previous relief procedures are consolidated into a single document.

(Revenue Procedure 2013-30.)

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IRS provides guidance for same-sex spouses.

In response to the Supreme Court's Windsor decision, the IRS has issued Revenue Ruling 2013-17 with guidance for same-sex married couples and registered domestic partners.

The IRS has ruled that same sex couples who are legally married in foreign or domestic jurisdictions shall be considered married for federal income tax purposes, even if they live in a state that doesn't recognize such unions. This ruling follows a previous ruling in Revenue Ruling 58-66 that couples who had a common law marriage and moved to a state that didn't recognize such marriages are still considered married for federal income tax purposes.

The rule also applies for the eligibility for employee benefits under the federal tax laws, such as the exclusion for employer-provided employee medical insurance covering a spouse.

"Husband" and "wife" will be interpreted to include a same sex spouse.

Registered domestic partners, civil unions or other similar formal relationships recognized under state laws that are not denominated as a marriage under that state's law are not considered to be marriages under the federal tax laws. (Some states recognize these relationships as marriages. Consult with legal counsel for the applicable state.)

The ruling is effective September 16, 2013, but taxpayers have the option to apply it sooner, including filing amended income tax returns for years for which the statute of limitations hasn't expired.

(Revenue Ruling 2013-17, August 29, 2013.)

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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: http://www.communitymedia.se/cat/linksca.htm.

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New time and stations for Financial Insider Weekly in Santa Cruz County, Watsonville and Capitola.

The broadcast time in Santa Cruz County, Watsonville and Capitola has changed to 6 p.m. on Wednesdays and 2 p.m. on Fridays. The program is now broadcast on Comcast Channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola.

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Financial Insider Weekly broadcast schedule for September and October.

Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 9:30 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 20, 2013, attorney Ray Sheffield, "Estate planning for retirement benefits"
September 27, 2013, Richard Lambie, professional fiduciary, "Selection and compensation of a professional fiduciary"
October 4, 2013, attorney Robert E. Temmerman, Jr., Temmerman, Cilley & Kohlmann, LLP, "I'm an executor! Now what?"
October 11, 2013, attorney Robert E. Temmerman, Jr., Temmerman, Cilley & Kohlmann, LLP, "I'm a trustee! Now what?"
October 18, 2013, James Brown, ASA, CFP®, Perisho, Tombor, Brown CPAs, "The role of a business valuation specialist"
October 25, 2013, attorney Naomi Comfort, Silicon Valley Elder Law, PC, "Special needs trusts"

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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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.

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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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