Michael Gray, CPA's
Real Estate Tax Letter
July 11, 2014
© 2014 by Michael C. Gray
ISSN 1930-0387
A monthly report focusing on tax issues for the homeowner and real estate investor.
Table of Contents
- The year is half over!
- Michael Gray explains interplay of passive activity rules with net investment income tax.
- Michael Gray will be out of the office part of July.
- California legislature passes residential debt cancellation exclusion.
- Tax Court doesn't believe taxpayer, says losses were passive.
- CPA and wife have deductions and rental losses disallowed.
- Part of purchase price for onerous lease was currently deductible.
- Surviving spouse allowed to rollover Roth accounts.
- IRS has an online payment system for individuals.
- Inherited IRA isn't protected from bankruptcy.
- Do you need help with your extended 2013 income tax returns?
- Do you need help with amended income tax returns?
- Does your group need a speaker?
- Please share your good experiences with Michael Gray, CPA.
- Financial Insider Weekly broadcast schedule.
- Follow me on Twitter, Facebook, LinkedIn and Google+!
- Do you know about our other newsletters?
- Check out my blog.
- Subscribe/Remove from Michael Gray, CPA's Real Estate Tax Letter
The year is half over!
The year is flying by. How is yours going? Tax planning is best done earlier when you can do something about 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.
Michael Gray explains interplay of passive activity rules with net investment income tax.
Michael Gray will give a live luncheon presentation to the Tax Interest Group, Silicon Valley San Jose Chapter of CalCPA from noon to 1:30 p.m. on Thursday, August 7. The subject is the interplay of the passive activity rules with the 3.8% net investment income tax. The meeting will be at Abbott, Stringham & Lynch, 1550 Leigh Ave., San Jose. The investment is $20 for CalCPA members and $30 for nonmembers. To register, use the CalCPA website at www.CalCPA.org or call Stephanie Stewart at 408-983-1122.
Michael Gray will be out of the office part of July.
Michael Gray will be out of the office on July 28 and 29. Make your appointment now.
California legislature passes residential debt cancellation exclusion.
The federal exclusion for up to $2 million of cancellation of debt income for a principal residence expired on December 31, 2013. California had a similar exclusion, with reduced exclusion thresholds of $500,000, or $250,000 for married persons filing a separate return. The California exclusion expired on December 31, 2012.
California's Senate and Assembly have both passed AB 1393 (Perea), which would retroactively extend California exclusion through December 31, 2013. Governor Brown is expected to sign the bill, but you might want to write an email to governor@governor.ca.gov to express your support.
By the way, the extension of the federal exclusion through 2014 has also been proposed. If it is enacted, California will have to enact legislation again to conform.
(Spidell's Flash E-mail)
Tax Court doesn't believe taxpayer, says losses were passive.
John Jason Bogner claimed the losses for his rental property for 2009 and 2010 were non-passive because he was a real estate professional. Mr. Bogner worked full-time for Northrup-Grummon and his wife worked full-time for International Rectifier. His rental property was a 3,000 square foot single family home, and he also managed two properties owned by his father.
The only substantiation submitted by Mr. Bogner was time logs that he kept for the rental properties and timesheets for his job at Northrup-Grummon, indicating that he worked more hours on rental management than his full-time employment.
The Tax Court didn't believe Mr. Bogner's records. They disallowed current losses for the rental property and imposed an accuracy-related penalty for the failure to keep adequate books and records or to substantiate their items properly.
The lesson is if you have other full-time employment, you are going to have a very hard sale convincing the Tax Court that you are a real estate professional and spend more than half of your working hours managing rental properties. (Especially one rental home!)
Although a time log should be viewed as required, it isn't sufficient. The facts and circumstances have to support your proposition of being a real estate professional.
(Bogner v. Commissioner, T.C. Summary Opinion 2014-53, June 16, 2014.)
CPA and wife have deductions and rental losses disallowed.
Jackie Robinson was a CPA and his wife, Lolita, had 15 years of experience working for the Securities and Exchange Commission.
Nonetheless, their income tax returns for 2007 and 2008 were a disaster.
The Tax Court upheld the IRS in disallowing their rental losses for two "rental houses." One of the houses wasn't made available for rent during a 10-year period, and minimal efforts were made to sell it. It was conveniently located close to Atlantic City. Jackie claimed real estate professional status for frequent stops at the home to maintain and remodel it. The Tax Court didn't believe him.
The second house was purchased jointly (with a right of survivorship) by Lolita with her daughter, Vera Vaughn, who wasn't able to qualify for a loan to buy it separately. Lolita paid rent to her mother for her share of the property.
The Tax Count and IRS found that neither of these homes was held for the production of income, so losses were disallowed.
In addition, other business expenses were disallowed for a home office that wasn't exclusively used for business purposes. Lolita used the office to prepare income tax returns for relatives for free. The IRS also found that Lolita didn't have an accounting business as reported on her income tax returns, so the business expenses were disallowed.
The IRS also imposed accuracy-related penalties.
This case is mostly worth studying to learn what not to do and to understand that "imaginative" or "creative" tax reporting can backfire.
Also, the IRS loves "high profile" taxpayers like the Robinsons that they can use as examples in their publicity about tax enforcement. High profile taxpayers should make an extra effort to "keep their noses clean."
(Robinson v. Commissioner, T.C. Memo. 2014-120, June 16, 2014.)
Part of purchase price for onerous lease was currently deductible.
The Sixth Circuit Court of Appeals upheld a federal District Court in granting a summary judgment against the IRS, allowing a current deduction for part of the purchase price of a building. The Sixth Circuit said an earlier decision by the Supreme Court, Cleveland Allerton Hotel, Inc. v. Commissioner (U.S.T.C. 48-1 9218) is still effective. The taxpayer had several appraisals indicating that the purchase price exceeded the fair market value of the property. The taxpayer was leasing the property, determined the rent was excessive and decided to exercise an option to purchase the property. The Sixth Circuit Court of Appeals and the U.S. District Court agreed that the excess of the purchase price over the fair market value of the property represented an amount paid to pay off an unexpired lease and was currently deductible.
(ABC Beverage Corporation v. U.S., 2014-1 U.S.T.C. 50,320, June 13, 2014.)
Surviving spouse allowed to rollover Roth accounts.
A surviving spouse was the sole trustee of a trust that was the beneficiary of her husband's two Roth IRA accounts. She had discretion to distribute the accounts to herself "for any purpose" because to do so would be in her "best interest."
The IRS ruled that her powers were sufficient for her to be considered the beneficiary of the Roth IRA accounts and entitled to roll them over to her own Roth IRA account.
If she wasn't considered to be the beneficiary of the accounts, they would have been considered inherited accounts and required minimum distributions would have been required to be made from them.
(Letter Ruling 201423043.)
IRS has an online payment system for individuals.
The IRS has an online payment system for individuals, called "Direct Pay." Using this system, you can pay your bills or make estimated tax payments directly from a checking or savings account without any fees or pre-registration requirements. (Another electronic payment system, EFTPS, requires pre-registration.)
To access "Direct Pay," go to the IRS web site at www.irs.gov. Then click the icon, "Pay Your Tax Bill." You must have a valid social security number to use the system.
Inherited IRA isn't protected from bankruptcy.
The United States Supreme Court has ruled that an inherited IRA account is not "retirement funds" and therefore not protected in bankruptcy from a beneficiary's creditors.
As a result of the ruling, surviving spouses have an incentive to treat IRAs of their deceased spouses as their own.
(Clark v. Rameker, 2014-1 U.S.T.C. 50,317, June 12, 2014.)
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.
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.
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.
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+.
Financial Insider Weekly broadcast schedule for July and August.
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 July and August:
- 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®, The Family Wealth Consulting Group, "The role of emotions in investing"
- August 1, 2014, Craig Martin, CFP®, The Family Wealth Consulting Group, "Using alternative investments to reduce risk"
- August 8, 2014, Janis Carney, attorney at law, Carney, Sugai & Sudweeks LLP, "Life care planning"
- August 15, 2014, Peggy Martin, CLU, ChFC, MSFC, FLMI, CASL, The Family Wealth Consulting Group, "Socially responsible & sustainable investing update"
- August 22, 2014, Janis Carney, attorney at law, Carney, Sugai & Sudweeks LLP, "Veterans' Administration benefits for long-term care"
- August 29, 2014, Naomi Comfort, attorney at law, Silicon Valley Elder Law, TBA
Financial Insider Weekly is also broadcast as follows:
- Sunday at 1 p.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola
- Monday at 1:30 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
- Monday at 4:00 p.m. and 7:00 p.m. Pacific Time on cable channel 19 in Morgan Hill and broadcast on the internet at the same time as streaming video at www.mhat.tv
- Mondays at 6:30 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
- Monday at 7:30 p.m. on Comcast channel 15 in Saratoga
- Tuesday at 10:30 a.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola
- Tuesday at 2:30 a.m. and 12:30 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
- Tuesday at 4:00 p.m. and 7:00 p.m. Pacific Time on cable channel 19 in Morgan Hill Broadcast on the internet at the same time as streaming video at www.mhat.tv
- Wednesday at 8:00 p.m. on Comcast channel 28 in Hayward, Alameda and Fremont and on AT&T U-Verse Channel 99, Hayward public access TV 28 in California
- Friday at 1:30 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
- Friday at 3:30 p.m. on KCAT, Comcast channel 15 in Los Gatos
- Friday at 4:00 p.m. on KMTV cable channel 15 in Cupertino, Los Altos and Mountain View
- Friday at 6:00 p.m. on Comcast and Astound channel 29 in San Francisco. Online streaming video at www.bavc.org, "public access TV"
- Friday at 8:00 p.m. on Comcast channel 28 in Hayward, Alameda and Fremont and on AT&T U-Verse Channel 99, Hayward public access TV 28 in California
- Saturday at 9:00 a.m. and 6:00 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
- Saturday at 1:00 p.m. on Comcast channel 26 and AT&T U-verse channel 99 in Marin County
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!
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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