Michael Gray, CPA's

Real Estate Tax Letter

Michael Gray, CPA's Real Estate Tax Letter

January 9, 2015

© 2015 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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Congress extends tax provisions for 2014 only.

Congress has passed and President Obama has approved on December 19, 2014 the Tax Increase Prevention Act of 2014. Many expired provisions, including bonus depreciation and the increased equipment expense limit were extended for 2014 only. We sent a separate email alert with some details. If you missed or misplaced the alert, call Dawn Siemer at 408-918-3162 or send her an email at dgsiemer@taxtrimmers.com and she'll resend it to you.

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Congress cuts funding for the IRS.

In separate budget legislation, Congress has cut the budget for the IRS for the second year in a row. Although Congress may be seeking to "punish" the IRS for abuses relating to items like perceived abuse of tax exempt agencies that favor conservative causes, the IRS is the agency that keeps revenue flowing to government coffers. In addition, the IRS is facing a huge administrative challenge of implementing Health Care Reform. This was not a wise move.

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Expired tax provisions will make tax planning uncertain for 2015.

Since the tax extenders package only applied for 2014, the tax laws for 2015 are uncertain. This will make planning uncertain. There is also some talk of tax reform legislation, but it doesn't seem likely to me considering the Republican majority in Congress and President Obama's lame duck position. It's clear that President Obama will not approve the repeal of Health Care Reform, and I don't think Congress will try to do it anyway.

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Special offer for Real Estate Tax Handbook, 2014 Edition extended.

We believe many of our readers missed our offer for the Real Estate Tax Handbook, 2014 Edition because of the holidays, so we are extending our offer. Some updates that are included are the new rules on repairs and capitalization, new rules for materials and supplies, federal estate planning changes, and the 3.8% net investment income tax. As an introductory offer, you can order a copy for $29.99, which is half price, plus $3.50 shipping and handling and, for California residents only, $2.93 sales tax. This offer expires January 31, 2015.

Your can use the form at the end of this newsletter to mail or fax your order or call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays, Thursdays or Fridays to order by telephone.

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Live presentation by Michael Gray, CPA for tax professionals.

Michael Gray will give a lunchtime presentation for the Silicon Valley San Jose chapter of CalCPA on January 15, 2015. The subject is "Survey of Lifetime Gift Planning and Form 709 - Part 1. (Part 2 will be presented on June 18.) The investment is $20 for members and $30 for nonmembers. Here is a link with the details. https://www2.calcpa.org. Call Dawn Siemer at 408-918-3162 for a paper flyer. You can also register by calling Stephanie Stewart at 408-983-1122.

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Repair and capitalization rules make extended tax returns likely.

According to the repair and capitalization regulations, change of accounting method forms should be submitted to the IRS for virtually every U.S. business and rental property. This huge paperwork job could bury tax return preparers and the IRS.

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Tax Court upholds real estate professional status.

It's refreshing when a taxpayer is successful in an area where so many others fail. Bill Lewis is a retired Vietnam veteran, who was disabled by injuries suffered during his military service. Bill's sole occupation is managing a triplex apartment located next to his residence. He performed most of the repairs and maintenance for the apartments himself as well as collecting rent and being available for tenant problems like lockouts.

Mr. Lewis was able to persuade the Tax Court that he spent at least 750 hours per year for these activities, partly because they took longer for him to perform because of his disabilities.

We and the Tax Court thank Mr. Lewis for his service!

(Lewis v. Commissioner, T.C. Summary Opinion 2014-112, December 23, 2014.)

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No records, no deductions.

A former attorney and his wife had several items disallowed by the IRS in a tax examination. The Tax Court allowed travel expenses that they were able to substantiate. They had inadequate books and records to substantiate many other items, including home office expenses, a $376,113.54 loss for guarantees relating to a bankrupt corporation, a capital loss carryover from the sale of real estate and net operating loss carryovers.

You would think a former attorney would know better and be more diligent. The taxpayers said their records were lost in Hurricanes Katrina, Rita, or Gustav. The Tax Court wasn't very sympathetic and said they should have been able to reconstruct most of the records and imposed accuracy-related penalties.

This was a harsh decision considering the bad breaks these taxpayers experienced. It underscored the importance of keeping good books and records, and reconstructing lost records. For the lay person, it's hard to judge whether a court will accept the records that you keep. I think part of the reason the IRS and the Tax Court were so harsh is because the individual was a former attorney.

(McClellan v. Commissioner, T.C. Memo. 2014-257, December 22, 2014.)

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Exchanges of California property for out of state property bring tax headaches.

As I've mentioned before, California requires annual reporting when California real estate is exchanged for out of state real estate until the out of state property is ultimately sold. The deferred gain from the California property is taxable at that time. This California tax when the property is ultimately sold is called "clawback."

Some states have clawback and others don't, which creates a dilemma. If the other state doesn't have clawback, a state tax credit won't be allowed for the California tax.

In addition, the penalty for failing to annually report the suspended gain in California is to accelerate the tax. Again, there will be no state tax credit for this California tax because it will be in a different year from the tax in the other state the property is located in.

This means state taxes may apply to the gain on the California property twice. (Note that when the out of state property is sold, the entire gain will be taxable by the other state at that time.)

What is the ultimate solution? Report the deferred gain to California annually and hold the property until you die. Then your heirs should receive a new basis for the property held at death, eliminating the deferred gain.

Be sure to consult with a tax advisor about these state tax issues before proceeding with a 1031 tax-deferred exchange of California real estate for real estate located in another state.

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Terminating a joint tenancy for California real estate can result in property tax reassessment.

Mrs. Mikkelson created a joint tenancy of the family residence with her son, Peter. She died in 1997, so Peter received the residence as the surviving joint tenant. Then Peter added his brother, James, as the joint tenant owner for the property. None of these events resulted in property tax reassessment.

In 2007, Peter and James terminated the joint tenancy and each received a 50% undivided interest in the residence.

The Marin County Assessor determined that the termination of the joint tenancy was a change of ownership for the property, and reassessed the value from $100,631 to $525,323 for the reassessment.

A California court of appeals upheld the reassessment, and the California Supreme Court denied a petition for further review.

When making title changes for California real estate, be sure to consult with an attorney who knows California's reassessment rules.

(Richard Benson v. Marin County Assessment Appeals Board (2013) 219 Cal. App. 4th 14453.)

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Sick pay requirement for California employers is coming.

California has adopted a new sick pay requirement for California employers that will be effective on July 1, 2015. Employers must provide at least three days of annual paid sick leave to California employees who work for them at least 90 days. (This won't be a change for employers who already have such a policy that provides at least the same number of days.) Paid sick time accrues at the rate of one hour for every 30 hours worked. Up to six days of unused sick days must be carried over, but an employer isn't required to pay more than three sick days per calendar year.

(AB 1522, California Labor Code §§ 245 et. seq.)

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Health care reform brings tax complexity.

When taxpayers get their medical insurance coverage using a state or federal exchange, they may qualify for a premium tax credit. It initially is applied as a subsidy to reduce medical insurance premiums. Virtually everyone who gets their medical insurance using an exchange is going to be required to complete Form 8962, Premium Tax Credit. This is a very complex form, and this requirement will probably lead many more low-income taxpayers to having their tax returns done by a paid tax return preparer.

By the way, about half of the two days of tax update classes that I attended to prepare for tax season this year were devoted to Health Care Reform.

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All employers should have their employee health insurance plans reviewed.

Virtually all employee health insurance should be provided through group health insurance plans. Employer reimbursement or payment of individual health insurance premiums is no longer permitted, and a big penalty can apply when employers have this kind of plan. I recommend that you consult with a qualified health insurance broker that specializes in group health plans about the status of the plan for your business.

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Employer mandate becomes effective.

Effective January 1, 2015, large employers with 50 or more full time equivalent employees are required to provide medical benefit coverage for their employees. None of our clients are of this size. I recommend that large company employees should give attention to complying with these changes. The penalties for failing to comply can be onerous.

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Business standard mileage rate increases.

The IRS has announced the standard mileage rate for 2015 increased to 57.5¢ per mile from 56¢ per mile for 2014. The standard mileage rate for medical and moving expenses decreased to 23¢ per mile for 2015 from 23.5¢ per mile for 2014.

(Notice 2014-79.)

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Tax preparation materials will soon be on the way.

We are mailing instructions to our clients this week and next. If we prepared your tax returns last year and you haven't received instructions by January 20 or you would otherwise like to receive instructions, call us at 408-918-3162.

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Make your tax return preparation interview appointment now.

Most personal interview appointments for preparing 2014 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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Fourth quarter estimated tax payment for non-corporate taxpayers is due January 15.

The final estimated tax payment for individuals and calendar-year estates and trusts is due January 15, 2015. Remember California taxpayers with taxable income of $1 million or more must pay their estimated taxes using the current year's facts. Watch the alternative minimum tax. See your tax advisor.

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W-2s, 1099s and DE 542 reminder.

Remember that most 2014 annual information returns, such as W-2s and 1099s, should be issued to payees by January 31 and sent to the tax authorities by March 2.

Amounts paid using a credit card should not be included on Form 1099. Those amounts are being reported by the merchant companies.

Also remember that Form 542, Report of Independent Contractors, should also be submitted for ongoing independent contractor arrangements by January 20. The due date is the earlier of 20 days after the date $600 or more of payments have been made to the independent contractor or the date a contract has been entered for $600 or more of services during a calendar year.

Although requirements for real estate operators to issue Forms 1099 were repealed, real estate operators that are real estate professionals should prepare them anyway. Some taxpayers who weren't concerned about qualifying as real estate professionals will want to for 2014 to avoid the Medicare tax for investment income. See your tax advisor for details.

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Watch FUTA adjustment on year end report.

California, among other states, has a cutback in its state credit for federal unemployment taxes. That means additional payments of up to $84 per employee will be due with Form 940. Be sure this adjustment is done with your year-end report for 2014.

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Estates and trusts should plan distributions.

The increase in the maximum federal income tax rate to 39.6% and the 3.8% tax on net investment income hit estates and trusts especially hard. They apply when the undistributed trust income exceeds $12,150. If possible, the income of the estate or trust should be distributed to beneficiaries before the year-end, since the threshold for these taxes is much higher for individuals. (The income of some trusts is automatically considered distributed. See your tax advisor.) An election is also available to treat distributions made during the first 65 days of the following year (for example, January 31, 2015) as distributed for a taxable year (for example 2014).

In most cases, capital gains don't qualify for the distribution deduction. See you tax advisor.

The beneficiaries should be involved in this decision and be informed about the additional income to be reported on their income tax returns (in writing) and to avoid unpleasant surprises.

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Remember to "reset" payroll on January 1.

Software providers will issue updates including the new payroll tax tables as of January 1, 2015. Be sure you have installed those updates before processing your first payroll for 2015.

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Annual payroll letter sent to business owner clients.

Each year we write a letter summarizing the payroll tax rates and payroll tax deposit requirements for the coming year. We also describe when Forms 1099 are required to be prepared for payees. If you would like to have a copy of the letter, please call Dawn Siemer at 408-918-3162.

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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 anytime, or Wednesdays, Thursdays, or Fridays before 2pm 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 San Mateo County.

Financial Insider Weekly is broadcast in San Mateo County at 10:00 a.m. on Tuesday, Thursday, Saturday and Sunday on Comcast channel 26, Astound Channel 27 and AT&T U-Verse Channel 99.

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Financial Insider Weekly broadcast schedule for January and February.

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 January and February:

January 2, 2015, Bettie Baker Marshall, attorney at law, "Legal considerations of caring for incapacitated relatives and friends"
January 9 and 16, 2015, Kate Levinson, "Emotional currency"
January 23, 2015, Peggy Martin, CLU, The Family Wealth Consulting Group, "Life insurance basics"
January 30, 2015, David Beck, CFP®, Bay Area Planners, "Financial aid for a college education"
February 6, 2015, Jennifer Cunneen, attorney at law, Hopkins & Carley, "Should a family trust be terminated considering recent federal tax law changes?"
February 13 and 20, 2015, Jennifer Cunneen, attorney at law, Hopkins & Carley, "California real estate reassessment change of ownership rules"
February 27, 2015, Richard Schachtili, attorney at law, Hopkins & Carley, "Succession planning for a family business"

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 Twitter, Facebook, LinkedIn and Google+!

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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If you have employee stock options, have you subscribed to Michael Gray, CPA's Option Alert at no charge or obligation?

To learn more, visit stockoptionadvisors.com/subscribe.shtml

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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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