Michael Gray, CPA's

Real Estate Tax Letter

June 11, 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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Second quarter 2014 estimated tax payment is due June 16.

The second 2014 estimated tax payment for individuals and calendar year corporations, estates and trusts is June 16. 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.

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 16.

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), FinCEN Form 114, for 2013 is due June 30, 2014. This is a new Form number to replace old TD F 90-22.1, but the information requested is basically the same. THE FORM MUST NOW BE EFILED, NOT MAILED. 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 www.fincen.gov/forms.

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State withholding forms are also due June 16.

Remember California requires withholding for payments to nonresident beneficiaries of estates and trusts, partners, S corporation shareholders, and landlords. The report, Form 592, is due quarterly, and the due date for the second quarter payment for 2014 is June 16, 2014. See your tax advisor or the Franchise Tax Board website, www.ftb.ca.gov, if you need more information about nonresident payee requirements.

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Michael Gray will be out of the office part of June.

Michael Gray will be out of the office for a conference from June 11 through June 13. Make your appointment now.

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Do you need help with your extended 2013 income tax returns?

The extended due date for calendar year business income tax returns is September 15 and the extended due date for calendar year individual income tax returns is October 15. We are already hard at work for these tax returns for many of our clients and we would welcome more. May we be of service with your extended returns? Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays to make an appointment.

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Do you need help with amended income tax returns?

We have already been meeting with folks who want a second look at their 2013 income tax returns for possible corrections. Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays to make an appointment.

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The earlier you do tax planning, the better.

Many people wait until the year-end for tax planning, but it's better to do it earlier in the year when it's easier to act on it. Why not make a tax planning appointment today? Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays to make an appointment.

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Pre-publication offer for Secrets of Tax Planning For Employee Stock Options, 2014 Edition.

I just finished an update of my book, Secrets of Tax Planning For Employee Stock Options, 2014 Edition. You can get a copy for half price if you order it by July 10, 2014. You can request information or call your order to Dawn Siemer Mondays, Wednesdays or Fridays at 408-918-3162, or here is a web page with some details www.employeestockoptionsecrets.com/prerelease.shtml.

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IRS changes position on California short sales and foreclosures.

The IRS sent a letter dated April 29, 2014 to Senator Barbara Boxer, updating previous advice in a letter dated September 19, 2013. The IRS has changed its position relating to "recourse" mortgage loans when there is a short sale or foreclosure. These are usually mortgages resulting from refinancing previous debt, not relating to the original purchase of a principal residence. Now the IRS says these mortgages are not eligible to be treated as nonrecourse debt. Cancellation of nonrecourse debt is treated as sale proceeds, and usually cancellation in a short sale or foreclosure will not result in cancellation of debt income.

Senator Boxer has asked for relief for taxpayers who relied on the IRS's letter of September 19, 2013.

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Trusts and estates must allocate "bundled fees."

The IRS has issued final regulations relating to whether deductions of estates and trusts are subject to the 2% of adjusted gross income floor. The most controversial item for the regulations is "bundled fees" - fees charged by banks and brokerage companies for acting as trustees or executors. The fees include an amount for managing investments that hasn't been stated separately.

The IRS, citing the Supreme Court ruling for Michael J. Knight, is requiring the fiduciary to allocate a portion of those fees to investment expenses, subject to the 2% floor. Under the regulations, any reasonable method may be used to allocate the fees.

Under the final regulations, tax return preparation fees to prepare the federal estate tax return, the decedent's final income tax return, and income tax returns for the estate or trust are not subject to the 2% floor as administration costs. Other tax return preparation, including catching up for back years' income tax returns and preparing gift tax returns are subject to the 2% floor.

Appraisal fees relating to tax return preparation for an estate or trust are not subject to the 2% floor as administration costs.

The final regulations are effective for tax years beginning after May 8, 2014.

(T.D. 9664, May 8, 2014.)

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Land developer denied completed contract method.

The Tax Court upheld the IRS in denying the use of the completed contract method of accounting for a land developer. The land contracts were only for common improvements and undeveloped lots. The customers were primarily builders of homes. Since the developer's land preparation for roads and utilities didn't relate to site improvements of the dwelling units, the activity didn't qualify for the completed contract method, which meant that the income couldn't be deferred.

(Hughes Company LLC, 142 TC No. 20.)

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Distribution by IRA to buy real estate was taxable.

An IRA owner received a distribution that was used to purchase real estate. The IRA owner claimed the distribution either represented a purchase of the real estate by the IRA or a transfer between trustees. The Court found that the terms of the IRA account, managed by a brokerage house, prohibited holding real estate. Another trustee didn't in fact receive the distribution.

Remember IRAs can hold real estate, but not all custodians accept real estate as permitted investments. They don't want to deal with the liability and management concerns of holding real estate. The fees for custodians that hold "alternative investments" tend to be higher than those that only hold conventional investments.

(Dabney, TC Memo. 2014-108.)

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Principal residence gain taxable when reacquired.

A taxpayer made an installment sale of his residence, and claimed the exemption for the sale of a principal residence. The buyer defaulted on the seller carryback loan, so the seller repossessed the property. The Tax Court ruled that $505,000 of payments previously received by the seller represented accession to wealth, which wasn't eligible for the principal residence exclusion. (Remember, the seller recovered ownership of the residence plus the $505,000 of cash, so this does make sense.)

(DeBough, 142 TC No. 17.)

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Counterclaim suspends foreclosure as passive activity disposition.

Taxpayers purchased two condominium units during 2005. The taxpayers transferred the condominiums to a limited liability company, which was taxed as a partnership. A mortgage company foreclosed on the properties during 2008, and filed for deficiency judgments against the taxpayers.

The couple filed a counterclaim. The claims were settled in 2011.

The LLC reported a net rental real estate loss of $31,000 for 2008. A final income tax return was filed for the LLC for 2010.

Initially, the taxpayers claimed they were real estate professionals, not subject to the passive activity loss rules. Later they conceded the losses were passive.

Then they claimed they were entitled to claim suspended passive activity losses in either 2008 or 2010.

The Tax Court upheld the IRS in finding the LLC wasn't terminated in 2010 because the counterclaim wasn't settled until 2011.

Since the entire interest in a passive activity must be disposed of in order to deduct suspended passive activity losses, the case points out a difficulty when real estate is held in an entity. The real estate may be gone, but the business of the entity may take some time to be wound up. (Remember to formally terminate an LLC with the Secretary of State.)

(Herwig, TC Memo. 2014-95.)

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Proposed REIT Regs allow solar power as qualified investments.

The IRS has issued proposed regulations to clarify the definition of real estate assets that may be owned by a real estate investment trust (REIT). The proposed regulations include solar energy facilities as qualified investments.

At least 75% of a REIT's total assets must include real estate assets, cash and cash items, and government securities at the end of each quarter of a tax year.

The proposed regulations define real property to include land, inherently permanent structures, and structural components. Land includes crops and other natural products until removed from the land.

(NPRM REG-150760-13.)

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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 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 13, 2014, attorney Jann Besson of Law Offices of Besson & Yarbrough, "Medi-CAL benefits for Long-Term Care"
June 20, 2014, Hilary Martin Hendershott, CFP(r), The Family Wealth Consulting Group, "Why most people will never achieve their financial goals"
June 27, 2014, Mark Erickson, attorney at law, "How to choose a good divorce lawyer" (Note change from program scheduled in last month's newsletter.)
July 4, 2014, Mark Erickson, attorney at law, "How to work with a divorce attorney cost effectively"
July 11, 2014, Nancy J. Ross, divorce coach and mediator, Bauer, Shepherd & Ross and Associates, "How a collaborative approach can help make divorce a less painful process"
July 18, 2014, Bernard Vogel III, attorney at law, Silicon Valley Law Group, "Choices of forms for doing business"
July 25, 2014, Craig Martin, CFP(r), The Family Wealth Consulting Group, "The role of emotions in investing"

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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