Michael Gray, CPA's

Real Estate Tax Letter

October 14, 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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Boo! The year will soon be over.

For many Americans, Halloween is their favorite holiday. How about you? Be careful with those kamikaze kids out there.

One thing we all know is Halloween means the year will soon be over. I hope yours has been a good one.

It's time to prepare for the end of the year. My schedule will be tight with various obligations and the holidays. Make your year-end planning appointment now. Call Dawn Siemer on Mondays, Wednesdays and Fridays from 9 a.m. to 5 p.m. at 408-918-3162.

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Final individual deadline is October 15.

It's too late for us to be able to prepare 2012 individual income tax returns for people to bring their information to us now. You can stop additional penalties and interest by filing late income tax returns as soon as possible. If you would like us to prepare your late 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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IRS has cut back operations.

Thanks to the U.S. government shut down cutting back funding, the IRS has cut back its operations. The IRS will continue to receive income tax returns. Almost all live services, including taxpayer assistance and tax audits are suspended. Automated services are still operational, and automated collection notices will continue to be mailed.

The IRS web site still works. (Thank goodness!)

(Spidell's Flash E-mail, "IRS announces cutback in operations", October 2, 2013.)

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IRS issues final "repair" regulations.

The IRS has issued its final regulations relating to whether repairs and other expenses may be expensed and deducted currently or must be capitalized and depreciated. The regulations have been modified in response to comments received for the temporary regulations that were issued during December 2011.

The taxpayers who will benefit most from the changes issue "applicable financial statements" (audited or regulatory financial statements). These taxpayers have a de minimus safe harbor of $5,000 "per invoice." Taxpayers that don't issue an "applicable financial statement" have a de minimus safe harbor of $500 "per invoice." In order to use the de minimus safe harbor, the taxpayer must have a written accounting policy in place as of January 1, 2014 adopting the standard for financial reporting purposes. Under these rules, low-cost materials and supplies or other expenses that otherwise would have to be capitalized can be currently deducted.

There is also some relief from the capitalization rules for "small taxpayers" that had annual gross receipts of $10 million or less during the three preceding tax years when the building had an unadjusted basis (cost) of no greater than $1 million.

The final regulations are effective January 1, 2014, but can optionally be applied for 2012 and 2013.

This is only a brief summary. Many taxpayers will have to adopt changes in accounting methods to comply with these new requirements. The IRS will issue procedures on how to automatically adopt changes. See your tax advisor after October 15.

(TD 9636.)

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Guest article about worthless real estate partnership interests.

Professor Joel Rosenfeld, Adjunct Professor at NYU Schack Real Estate Institute, Graduate School and CPA has contributed an article about claiming a loss for a worthless real estate partnership interest. You can read it here: www.realestateinvestingtax.com/worthless.shtml.

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California disallows passive loss for real estate professional.

California's State Board of Equalization upheld the Franchise Tax Board in disallowing passive activity losses from rental activities of taxpayers who claimed the real estate professional exception to the limitation under the Internal Revenue Code. California hasn't conformed to the federal real estate professional exception, so the limitations are applied disregarding that exception.

The taxpayers materially participated in managing the properties, but they had more than $150,000 of adjusted gross income for the four years in question, so they didn't qualify to deduct $25,000 of their real estate losses for those years.

(Appeal of Hannon and Riddle, California State Board of Equalization, Case No. 613264, April 24, 2013.)

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IRS gives details for expensing some real estate improvements.

The "Fiscal Cliff" federal tax legislation passed last January, also known as the American Taxpayer Relief Act of 2012, included an extension of the Section 179 expense election for qualified real property through 2013. It also enables taxpayers to carryforward unused expense election deductions an additional two years through 2013.

The IRS has issued Notice 2013-59 to explain some of the details of these provisions.

The expense election allows taxpayers to currently deduct up to $500,000 for 2013 and $25,000 for 2014 for otherwise depreciable property. The deduction is limited to the net trade or business taxable income for the tax year, and the excess is carried over.

Up to $250,000 per year of qualified real estate can be included in the amount for which the expense election is made. Qualified real estate includes certain qualified leasehold improvements, qualified restaurant property and qualified retail improvement property.

Any part of the carryover attributable to qualified real estate that is unused because of the income limitation is treated as acquired in 2013 and depreciated starting in that year. Previously, the unused amount had to start being depreciated in 2011. Under the Notice, the taxpayer can continue depreciating the property under the schedule started in 2011 or amend the 2011 income tax return to continue carrying over the unused amount.

When the taxpayer makes the expense election for qualified real estate and other property, the unused expense election amount carried forward attributable to qualified real estate is determined on a pro-rata basis.

Notice 2013-59 also includes guidance for when qualified real property is disposed in 2010 through 2013 when an unused expense amount is being carried forward for the property. The unused expense amount is added to the tax basis of the property when computing the gain or loss for the disposition.

(Notice 2013-59, September 10, 2013.)

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IRS per diem rates increased.

The IRS has announced an increase in the daily per diem expense rates for travel in the continental United States, effective for expenses incurred after September 30, 2013. The rate for high-cost areas is $251 ($186 for lodging and $65 for meals and incidental expenses.) The rate for other areas is $170 ($118 for lodging and $52 for meals and incidental expenses.) The per diem rates provide a convenience because documentation of expenses with a receipt isn't required. (The travel itself must still be documented.)

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Financial Insider Weekly broadcast schedule for October and November.

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 the rest of October and November:

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"
November 1, 2013, attorney William Mahan, of counsel to Gates Eisenhart Dawson, "Why you need a will"
November 8, 2013, attorney William Mahan, of counsel to Gates Eisenhart Dawson, "Tax considerations of title"
November 15, 2013, attorney Bettie Baker Marshall, "Legal considerations of caring for incapacitated persons"
November 22, 2013, Emmett Carson, PhD, CEO, Silicon Valley Community Foundation, "Promoting Community Giving as a Family Value"
November 29, 2013, Geraldine Barry, President, San Jose Real Estate Investors Association, "How I got started investing in real estate"

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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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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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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