Michael Gray, CPA's

Real Estate Tax Letter

Michael Gray, CPA's Real Estate Tax Letter

March 20, 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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It's extension season!

Before we know it, it will be April 15! If we haven't already received the information to prepare your income tax returns, please send the information so that we can process extension requests.

To make your appointment for a meeting now, call 408-918-3162.

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IRS gives penalty relief for certain small employer health care plans.

Great news for small employers that reimbursed their employees for the cost of individual health coverage during 2014! The IRS has announced it will waive the $100 per day, per employee penalty for violating rules under Health Care Reform under Internal Revenue Code Section 4980D in this situation. The penalty, which could be $36,500 per applicable employee is very onerous. Many tax return preparers will also be relieved that they won't have to give this terrible news to their clients.

The employers that qualify for the waiver aren't required to file IRS Form 8928 for 2014.

(The reimbursement should have been included in the employee's W-2 wages for 2014.)

The relief doesn't apply to "Applicable Large Employers."

The IRS is providing this relief to give small employers time to either discontinue the practice of paying for individual medical insurance for their employees or putting a qualified group health plan in place. The waiver applies to payments up to June 30, 2015.

(IRS Notice 2015-17, February 18, 2015.)

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Most small businesses excused from filing change of accounting method form for repair and capitalization rules.

The IRS has announced relief in Revenue Procedure 2015-20 for small businesses and real estate investors relating to its new rules for repairs, materials and supplies, and capitalization.

Small business taxpayers with total assets of less than $10 million and average annual gross receipts of $10 million or less in the three years preceding 2014 (2011 - 2013) won't have to file a change of accounting form, Form 3115, for 2014 after all.

The new rules will generally only apply for small business taxpayers to expenses incurred starting in 2014, and not retroactively as previously announced. The change of accounting will still be required to be made in statements included in the 2014 income tax return.

Some small business taxpayers still might decide to file the change of accounting method form if they want to take advantage of a new rule to claim a tax deduction for the undepreciated cost of a part of a building that was replaced, such as a roof replacement.

Small business taxpayers and real estate investors should still consult with tax advisors familiar with the rules to understand them and to make necessary elections on their 2014 income tax returns.

Tax return preparers and taxpayers will all have a sigh of relief from this announcement. This announcement will also save a forest for the mountain of paper forms that would have been required to be sent to the IRS and reduce the number of extensions for 2014 income tax returns.

We should all thank groups like the American Institute of Certified Public Accountants that tirelessly worked with the IRS for this modification of the requirements.

(Revenue Procedure 2015-20.)

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Remember to make materials and supplies election.

An election is available to currently deduct purchases of items that cost $500 or less for 2014. The taxpayer must have had an accounting procedure in place on January 1, 2014 in order to make the election. The election must be included in the federal tax return each year to get the tax benefit.

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Partial write off election is now available.

Under the new repair and capitalization regulations, generally effective for 2014, taxpayers can elect to make a partial writeoff of the depreciated part of a building when it is replaced, such when the roof is replaced. This is an annual election on a case by case basis. Ask your tax advisor for details.

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Be alert for tax scam.

Fraudsters are calling people claiming to be IRS collection officers and threatening legal action unless an immediate payment is made. The IRS doesn't initiate collection actions in this way. Hang up. When you have a significant tax collection issue, it's probably best to have a tax professional represent you.

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California exclusion for cancellation of residential debt not yet extended.

The federal government recently extended the exclusion from taxable income of cancellation of debt for acquisition or improvement of a principal residence through 2014. California has had different limitations for the exclusion and hasn't yet conformed to the federal change. California taxpayers who had a cancellation of debt for the acquisition or improvement of their principal residence should consider extending the filing date for their 2014 income tax returns, because California has conformed to the federal dates in the past. Alternatively, the taxpayer might qualify for the insolvency exclusion.

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Identity theft creates a race to file income tax returns.

The IRS processes the efile of the first tax return that it receives for a social security number. We had two clients who had to file paper income tax returns and submit documents to the IRS because someone else filed income tax returns with their social security numbers before we submitted their efilings. It's a mess to straighten this situation out.

This is another good reason to file your income tax returns as early as possible and avoid extending the time to file your income tax returns.

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Store could be depreciated before it was open to the public.

A federal district court ruled that two buildings designed to be retail stores were placed in service, so they could start being depreciated, when they were substantially complete. The court ruled against the IRS's position that the buildings couldn't be depreciated until they were open to the public. Since bonus depreciation was available for some of the improvements, the taxpayer received substantial tax benefits from this ruling.

(Stine, LLC, 2015-1 USTC 50,172, January 27, 2015.)

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Another taxpayer fails to substantiate "real estate professional" status.

Edgar Flores, Sr. owned residential real property and performed all of the maintenance. He also was an employee.

He claimed to be a real estate professional during 2011 and deducted the losses from his rental property as a current tax deduction.

The Tax Court upheld the IRS in disallowing the rental loss deductions. One of the tests to qualify as a real estate professional is the taxpayer must work more hours in the real estate activity than in any other activity.

The Court didn't believe that Edgar worked more hours on his rental property than in his employment.

This case again shows that it's hard to qualify as a real estate professional when you have other employment. One way to deal with this issue for married couples is for the spouse who doesn't have other employment to perform the services for the property. In order for this to work, the married couple must file a joint income tax return.

The IRS is successfully targeting real estate professionals. It's not a "slam dunk."

(Edgar Flores, Sr. and Julia Flores v. Commissioner, T.C. Memo. 2015-9, January 12, 2015.)

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Mortgage interest allowed to "equitable owner."

Qui Van Phan moved into a home with his mother. He paid the mortgage, property tax and insurance for the home starting in 2010, with the understanding he would be put on the title for the home. He also made improvements to the home.

Qui's name was added to the legal title to the property in 2013.

The IRS tried to disallow Qui's deduction for residential mortgage interest for 2010 because he didn't have legal ownership of the residence.

In a summary opinion that can't be cited as precedent, the Tax Court allowed the deduction. The Court said he had equitable title to the home because of the oral agreement that he would be put on the title since he treated the home as his residence, paid all of the expenses for maintenance of the home and it was orally agreed he would be added to the title.

Qui's family would have avoided this fight with the IRS and litigation expenses to go to Tax Court by adding his name to the title when he moved into the home during 2008.

(Qui Van Phan v. Commissioner, T.C. Summary Opinion 2015-1, January 12, 2015.)

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IRS Chief Counsel says mortgage brokers aren't in a real estate business.

According to the IRS Chief Counsel, a mortgage broker may be considered a real property brokerage business under state law, but it isn't a real estate business for testing whether an individual qualifies as a real estate professional under federal law. It's a financing business. This is an important ruling under the passive activity loss rules, and some mortgage brokers who believed they qualified as real estate professionals may be unpleasantly surprised.

A side effect is mortgage brokers who don't qualify as real estate professionals may find they are subject to the 3.8% net investment income tax on their investment income, including from rental real estate.

(CCA 201504010.)

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Postponed taxable income from business debt cancellation starts being taxable in 2014.

As business income tax returns are prepared for 2014, some taxpayers and their tax return preparers need to remember that it's time to start "paying the piper" for certain business debt cancellation income.

As a tax relief measure for taxpayers who were suffering during the Great Recession during 2009 and 2010, Congress enacted Internal Revenue Code Section 108(i), which provided an election to postpone taxation of business debt cancellation and enabled taxpayers to spread the taxation ratably over a five-year period. For both years, the income starts being taxable for 2014.

If this applies to you, remind your tax return preparer (and tax return preparers should also remind clients when it applies to them).

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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 March and April.

Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 9:30 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 March and April:

March 20, 2015, Greg Carpenter, BTI Group Mergers & Acquisitiions, "Buying a business"
March 27, 2015, Greg Carpenter, BTI Group Mergers & Acquisitions, "Selling a business"
April 3 and 10, 2015, James Brown, ASA, CFO®, Perisho, Tombor & Brown, PC, "The role of the business valuation specialist"
April 17 and 24, 2015, David Howard, CPA and attorney at law, Loomis & Co CPAs, LLP, "Foreign account reporting update"

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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