Michael Gray, CPA's

Real Estate Tax Letter

February 5, 2014

© 2014 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!

We have already started receiving tax projects from clients. Thanks for getting your information here early! If we sent you instructions for the Tax Notebook organizer and we prepared income tax returns for you last year, you should have information to log into the site. If you have any questions relating to this, call Dawn Siemer on a Monday, Wednesday or Friday at 408-918-3162.

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Make your tax return preparation interview appointment now.

Most personal interview appointments for preparing 2013 individual income tax returns will be scheduled in February. Many clients send their information without having an interview, but if you need that personal attention, you should schedule your interview appointment now. Call Dawn Siemer Monday, Wednesday or Friday at 408-918-3162.

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Radio interview of Michael Gray will broadcast on February 6.

Lori Greymont interviewed Michael Gray, CPA on her "Real Estate 360" show. It will be broadcast in the San Francisco Bay Area on KDOW, AM 1220 from 3-4 p.m. Pacific Time on Thursday, February 6. The show will also be broadcast at the same time as streaming audio at KDOW.biz. Press the "Listen Live" button at the web site to listen to the show. The topic of the interview is "Opportunities and pitfalls of investing in real estate using a Roth or IRA account."

Hope you can listen in, and tell your friends!

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IRS e-filing started January 31.

The IRS processing season started 10 days later than originally planned when it started accepting most e-filed income tax returns on January 31. The delay was a result of the 16-day U.S. government shut down last fall.

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Taxpayer fails to substantiate improvements to sold property.

The Los Angeles Unified School District initiated an eminent domain proceeding against an apartment building owned by Fields Curtis. The school district took possession of the property on October 25, 2006 and the superior court entered a judgment in condemnation on October 24, 2007.

Mr. Curtis didn't replace the property, so he wasn't eligible for tax deferral under the involuntary conversion rules.

He also failed to file for an extension of time to file his 2007 income tax return and filed his income tax return late on October 13, 2008.

The Tax Court upheld the IRS in finding that the taxpayer overstated improvements and restorations to the property as $461,504, of which the IRS accepted $129,938. Therefore, there was additional capital gain for the sale of the property of about $331,566.

In addition, the Tax Court upheld the IRS in disallowing a $25,000 rental real estate loss claimed on the tax return. Since the school district took possession of the property in October of 2006, Mr. Curtis received no rental income for 2007 and was not engaged in the trade or business of renting real estate during 2007.

This case highlights the importance of keeping records for improvements to real estate because the documentation might be needed years later when the property is sold.

(Fields Curtis v. Commissioner, T.C. Memo. 2014-19, January 28, 2014.)

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Moveable walls qualify for fast depreciation but not conventional drywalls.

The IRS confirmed a taxpayer's proposed treatment of two different types of walls for buildings owned and leased by the taxpayer.

One type of wall is a zip partition. These walls can be removed without damaging the wall or the building and then reused. This type of wall qualifies to be depreciated using a 5-year life (9 years under the alternative depreciation system) under asset class 57.0, Distributive Trades and Services, of Rev. Proc. 87-56.

The second type of (non-load bearing) wall is conventional drywall partitions. These walls can't be removed without demolishing them, but the building isn't damaged when these walls are removed. This type of wall is depreciated using a 39-year life (40 years under the alternative depreciation system), as nonresidential real property.

(IRS Letter Ruling 201404001 (August 23, 2013.)

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IRS issues procedures for changes to new repair and capitalization rules.

The IRS issued new rules relating to the deductibility of certain repairs and when other repairs must be capitalized and accounting for materials, small equipment items and supplies in regulations issued last September (T.D. 9636.) The regulations are effective on January 1, 2014, but can be optionally adopted by taxpayers for 2012 or 2013.

Now procedures have been issued about how to change accounting methods for affected items. Although the changes will generally be automatically approved by the IRS, filing change of accounting forms will involved considerable effort and expense by taxpayers and their advisors to assemble the information. Unfortunately, the new regulations were not on a "go forward only" basis.

(Revenue Procedure 2014-16.)

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Some taxpayers get another chance at Estate and Gift Tax Portability election.

Taxpayers who failed to timely make an election to make the unused estate and gift tax exemption of a deceased spouse available to a surviving spouse, called a "portability election," have been granted an extension of time by the IRS to make the election. In order to qualify, the deceased spouse must have died after 2010 and before 2014, and no estate tax return could have been filed because the only reason for filing the return would be to make the portability election. See your tax advisor for details.

(Revenue Procedure 2014-18.)

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Dodd-Frank law changes private mortgage requirements.

I'm not a lawyer. Individuals who participate in private mortgages, including lease-purchase arrangements, need to be aware that new federal requirements have been enacted for these transactions. The requirements are intended to protect consumers, but reduce the flexibility for these loans. I recommend that you seek legal counsel about how they apply to you. The rules apply to residential mortgages, not mortgages for commercial properties.

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New California LLC Act may require action.

California has enacted a new limited liability company (LLC) act that took effect January 1, 2014. As I understand it, certain provisions of the Act affect the rights of LLC members when the LLC is a California LLC and is not a single-member LLC or an LLC with only spouses as members. To avoid bad unintended results, these LLCs should have their operating agreements reviewed and updated. See your business attorney.

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IRS audit rate is way down.

The audit rate during 2013 fell to less than one percent of the tax returns filed. The rate for taxpayers with income of $1 million or more was much higher, 10.85%, down from 12.14% for 2012. The rate for taxpayers with incomes between $200,000 and $1,000,000 was 2.7%.

The lower rates are a reflection of reduced funding and staffing for the Internal Revenue Service, and the government shut down.

Things look worse for the IRS for 2014. The new federal budget just approved by President Obama on January 17, 2014 reduces the appropriation to the IRS from about $11.8 billion in 2013 to about $11.3 billion for 2014. Don't expect much personal help from the IRS with your tax questions this tax season. Fortunately, the IRS has an excellent web site where you can find answers to many questions.

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Does your group need a speaker?

We are seeking opportunities to speak before groups. Topics include recent tax developments, tax issues relating to real estate, how estate planning has changed recently, tax issues relating to alternative investments using retirement accounts, and marketing topics such as "How I created a public access television show broadcast on eleven Bay Area stations." To make arrangements, call Michael Gray at 408-918-3161.

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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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Financial Insider Weekly broadcast schedule for February and March.

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 February and March:

February 7, 2014, Raymond Sheffield, attorney at law, Sheffield Law Office, "Estate tax planning for retirement accounts"
February 14, 2014, Raymond Sheffield, attorney at law, Sheffield Law Office, "Handling retirement accounts after a death"
February 21, 2014, Professor Patricia Cain, Santa Clara University School of Law, "Tax issues for same sex couples"
February 28, 2014, David Howard, attorney at law, Hoge, Fenton Jones & Appel, "Fixing IRS reporting problems for foreign assets"
March 7, 2014, David Howard, attorney at law, Hoge, Fenton, Jones & Appel, "Tax reporting of foreign bank and investment accounts for individuals"
March 14, 2014, Dick Blakeley, The Blakeley Group, "Setting family financial goals and reaching them"
March 21, 2014, Alan Nobler, attorney at law, "How a collaborative team can help preserve your legacy"
March 28, 2014, Stephen H. Salmeyer, attorney at law and psychologist, "Why emotions matter when resolving financial disputes"

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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Questions and Answers

Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter.

Dear readers:

Many of your questions relate to the sale of a principal residence. We have an article at our web site, "Could your residence be the ultimate tax shelter?" (www.realestateinvestingtax.com/residence.shtml) where you should be able to find the answers to most of these questions.

Many other questions relate to short sales and foreclosures. See our article on that subject at www.realestateinvestingtax.com/shortsale.shtml.

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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.

Have employee stock options? Subscribe to our free newsletter, Michael Gray, CPA's Option Alert! To learn more, visit stockoptionadvisors.com/subscribe.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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