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The June 2014 newsletter focusing on tax issues for the homeowner and real estate investor, by certified public accountants in California.
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Michael Gray, CPA's

Real Estate Tax Letter

August 22, 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

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

Michael Gray will be out of town the week of September 8, returning September 15. He will not be checking messages or emails until he returns. Get your projects due September 15 right away!

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Extended 2013 calendar year corporations, S corporations, partnerships, estates and trust tax returns are due September 15.

To avoid significant late filing penalties, be sure to submit your income tax returns for these entities on time. This is also the due date for making most business retirement plan contributions for these entities for 2013.

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Third quarter estimated federal income tax payments are due September 15.

The third quarter federal estimated tax payment for individuals and calendar year corporations, S corporations, partnerships and trusts is due September 15. California doesn't have a third quarter payment because the first two payments are "front loaded." Most taxpayers who make estimated tax payments will base them on their 2013 tax liabilities. Those who have uneven income or whose income will be less than last year's should consult with their tax advisor to have tax projections done. Our clients should have them done by September 5, after which I'll be out of town for a week.

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Extended 2013 calendar year individual income tax returns are due October 15.

Remember the extended due date for 2013 income tax returns is October 15, less than two months away. If you haven't done so already, get the information to prepare your tax returns to your tax return preparer now. This is the extended tax season for tax return preparers, so plan on preparers being under stress and grumpy. Bring food.

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Property tax appeals deadline approaches.

The deadline for property tax assessment appeals expires on September 15, 2014 in Santa Clara County. Here is a link to a list of the deadlines for other counties - www.boe.ca.gov/proptaxes/pdf/lta14022.pdf.

(Spidell's California Taxletter, August 1, 2014, page 12.)

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Governor Brown signs extension of 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. Governor Brown signed an extension of California's exclusion, with reduced exclusion thresholds of $500,000, or $250,000 for married persons filing a separate return. The change legislation, AB 1393, retroactively extends the expiration dates for the California exclusion from December 31, 2012 to December 31, 2013.

California taxpayers who qualify and previously filed their 2013 income tax returns without claiming the exclusion should file amended income tax returns, Form 540X, available at www.ftb.ca.gov or by a tax return preparer.

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Franchise Tax Board explains LLC filing requirements.

The Franchise Tax Board has issued a ruling explaining its position about when an LLC with more than one member (owner/partner) formed outside of California is required to file a California income tax return and pay the $800 California tax. Here is a link to their ruling. https://www.ftb.ca.gov/law/rulings/active/lr14_01.pdf.

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Excluded gain from sale of residence doesn't reduce previously suspended losses.

When a rental residence is converted to a principal residence, it becomes a previous passive activity, and any disallowed passive activity losses aren't deductible until the residence is sold. The IRS Chief Counsel issued advice that the suspended passive activity losses aren't reduced considering the exclusion of gain from the sale of a principal residence. All of the suspended passive activity losses are deductible against other income when the residence is sold to an unrelated party.

(CCA 201428008, July 14, 2014.)

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Mortgage loan to buy a second home doesn't qualify for exclusion.

A married couple took out a home equity loan on the Arizona residence and used the proceeds to buy a second home in Florida. The mortgage on the Arizona home was later foreclosed. The Tax Court ruled that, since the proceeds weren't used to purchase or improve the Arizona residence, the equity line didn't qualify for the exclusion for cancellation of debt on a principal residence.

(Koriakos, TC Summary Opinion 2014-70, July 16, 2014.)

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Self-directed IRAs required to value assets.

The IRS says that self-directed IRAs will be required to report the fair market value of their assets starting in 2015. This requirement will probably increase the annual cost of maintaining such an account, and the account owner will probably be responsible for getting the valuations. Here's a link to a blog post on this subject. michaelgraycpa.com/2014/08/07/new-self-directed-ira-and-roth-accounts-must-be-valued-each-year/

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IRS Chief Counsel gives guidance for real estate professionals.

According to the IRS Chief Counsel, the hours for all real-estate related activities, not just those for which the taxpayer materially participates, are counted to determine if the 750-hour test is met to qualify as a real estate professional. In order to avoid the passive activity limitation for rental real estate, the taxpayer must also meet the 500-hour material participation test for the individual rental real estate property, or for all properties if the taxpayer has elected to treat them as one.

(CCA 201427016, April 28, 2014.)

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"Longevity annuities" now allowed for retirement accounts.

The IRS has created an exception to the Required Minimum Distribution rules, besides the option of paying IRA benefits (and benefits for other qualified plans) as an annuity starting at the required beginning date (April 1 of the year following the year the taxpayer reaches age 70 ½), by issuing regulations allowing "longevity annuities." The option is effective for contracts purchased on or after July 1, 2014. The lesser of 25% of the participant's account or $125,000 could be invested in a "qualified longevity annuity contract" (QLAC). The QLAC must begin its payments no later than when the participant reaches age 85, must provide no death benefit other than a life annuity or a lump-sum return of principal payment to a surviving beneficiary, and can't be a variable or equity-indexed contract. The annuity is permitted to provide cost of living adjustments to benefits. If an annuitized benefit is paid to a surviving spouse, a lump-sum benefit can be paid to the remaining beneficiaries after the surviving spouse's death. The IRS may issue notices to increase the $125,000 limit and the age 85 beginning date for changes in the cost of living and mortality.

(T.D. 9673, July 1, 2014.)

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Tax deductions disallowed for RV used for business.

A husband and wife who had an insurance business bought RVs and went to RV rallies at which they actively promoted their business. (One of the RVs was a $248,457 Winnebago.) They claimed on their 2006 and 2007 income tax returns that the RVs were used 100% for business and claimed big deductions for depreciation and interest expense.

They didn't keep good records for 2006 but persuaded the Tax Court that the RV was used for business two-thirds of the time for 2007.

The Tax Court disallowed all of their business deductions for the RVs. Under the home office rules, Internal Revenue Code Section 280A, none of the business use of a residence is deductible if it is used the greater of 14 days or 10% of the number of days during the year for which the residence is rented at a fair rental. Any personal use of the unit, including watching television, during a day makes the whole day personal use. (An exception for an area used exclusively to meet with customers didn't apply in this case.)

With this decision, the IRS has a club that it can use against virtually anyone who claims tax deductions for the business use of an RV. (Ouch!)

(Jackson, T.C. Memo. 2014-160, August 7, 2014.)

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Remember California requires withholding for installment sales of California real estate.

In the August 2014 issue of Taxnews, the Franchise Tax Board (FTB) reminded readers that California income tax is required to be withheld by the payer from each installment sale payment for the purchase of California real estate and paid to the FTB by the 20th day of the month following the receipt of the payment. The payment is made using California Form 593-V (Payment Voucher for Real Estate Withholding) and Form 593 (Real Estate Withholding Statement). The withholding for the first payment is made by the real estate escrow company. Only the initial Form 593 is required to be signed by the seller.

Also see Franchise Tax Board Publication 1016, Real Estate Withholding Guidelines at www.ftb.ca.gov.

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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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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 August and September.

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 August and September:

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, "Estate planning documents in action - Donald Sterling's story"
September 5, 2014, Naomi Comfort, attorney at law, Silicon Valley Elder Law, "Financial scams with elderly victims"
September 12, 2014, Dick Blakeley, CEO, The Blakeley Group, Inc., "Family Wealth Literacy"
September 19, 2014, Dick Blakeley, CEO, The Blakeley Group, Inc., "Family Wealth Literacy" (repeat broadcast)
September 26, 2014, Scott Haislet, attorney at law, "New repair and capitalization income tax rules for business and rental real estate owners"

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

Past episodes of Financial Insider Weekly are posted on YouTube. One way to watch them is to go to our web site, www.financialinsiderweekly.com, and click on "Past Episodes."

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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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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Looking for more free real estate tax advice? Visit our real estate investing tax site at Realestateinvestingtax.com.


The August 2014 issue of Michael Gray, CPA's Real Estate Taxletter, focusing on tax issues for the homeowner and real estate investor, by certified public accountants in California.
Michael Gray, CPA
2190 Stokes St. Ste. 102
San Jose, CA 95128
(408) 918-3162
FAX: (408) 998-2766