Michael Gray, CPA's

Real Estate Tax Letter

Michael Gray, CPA's Real Estate Tax Letter

June 8, 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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Michael Gray out of office.

Michael Gray will be out of the office June 10 and 12, returning June 15.

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Second quarter estimated tax deadline is June 15.

The second estimated tax due date for calendar-year taxpayers is June 15. Federal estimated tax payments (for estimated tax exceeding withholding) can be based on 110% of 2014 tax on your income tax return if your adjusted gross income exceeds $150,000. Alternatively, you can make payments based on your income and deductions for 2015.

The California payment is 40% of estimated tax for the year. Like federal estimated tax payments, California payments can be 110% of 2014 tax, unless your adjusted gross income is $1 million or more. In that case, your estimated tax payments should be based on your actual income and deductions for 2015.

If you want our help computing your second quarter estimated tax payments, call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays to make an appointment for a consultation.

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California LLC fee payment is due June 15.

The due date for calendar year California LLCs make their 2015 annual fee payment is June 15, 2015. The fee is based on the expected gross income of the LLC, and can be based on the fee reported on the 2014 income tax return for the LLC. The fee for LLCs that have less than $250,000 of gross income is zero. See your tax advisor for help with computing the fee for your LLC.

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Foreign account reports will soon be due.

The due date for FinCEN 114, the report of foreign accounts for 2014, is June 30, 2015. It applies for foreign bank and brokerage accounts and certain other financial accounts exceeding $10,000 at any time during 2014 owned by the taxpayer or for which the taxpayer had signature authority. The form must be efiled. If you have any questions about this form, consult with your professional tax advisor.

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Michael Gray gives a LIVE seminar presentation for tax professionals.

Michael Gray will present Part 2 of a two-part series of lunchtime presentations of a "Survey of lifetime gift planning and Form 709" for the Estate & Trust Group, Silicon Valley San Jose chapter of CalCPA. The presentation will be from noon to 1:30 p.m. on Thursday, June 18 at Abbott Stringham & Lynch, 1550 Leigh Ave. in San Jose. Lunch is included. The investment with an advance reservation is $20 for CalCPA members and $30 for nonmembers. For reservations, call Stephanie Stewart at 408-983-1122 or register online at www.calcpa.org/events-and-programs/event-details?id=fcd554ea-507b-46c7-b23d-fd4d841851b6

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Losses disallowed for former vacation home.

Robert and Pamela Redisch bought a beach home in Florida during 2004 where they enjoyed vacations with their daughter. After their daughter's death in 2006, they couldn't bear to stay in the residence anymore. During April, 2008 the Resdisches entered a one-year agreement with a local realty office to attempt to rent the residence. The residence was featured in a portfolio of rental properties in the realty company's office. They weren't successful in renting the property.

Finally, the Redisches listed the residence for sale with a different real estate agent in June 2009 and sold the residence for a loss in December 2010.

The Redisches claimed rental losses on Schedule E on their 2009 and 2010 federal income tax returns, and a capital loss from the sale of the home for 2010.

The IRS audited their income tax returns and disallowed deductions for the rental losses and the loss on the sale of the residence. The Resdisches amended their income tax returns to claim the loss was an ordinary loss for the sale of rental property, not a capital loss as originally reported.

The Tax Court found that the Redisches and their real estate agents didn't devote sufficient effort to renting the home to convert it to a rental property. Therefore, the rental losses and the loss from the sale of the home were disallowed.

This was a sad case. The Redisches lived in another state. As a full-time veterinarian, Mr. Redisch wouldn't be able to devote considerable time to renting out the property. He didn't provide any evidence except for his testimony of their rental efforts. If the Redisches were successful in renting the property for some period after abandoning it, they would have had a different result.

(Redisch v. Commissioner, T.C. Memo.2015-95, May 19, 2015.)

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S corporation rental income wasn't disqualified investment income.

An S corporation can lose its subchapter S status if it has earnings and profits from previous C corporation years and has gross receipts for three consecutive years that includes more than 25% passive investment income. Usually rental real estate income from a net lease is considered passive investment income.

A corporation that was considering making an S election asked the IRS if its rental income would be net investment income. It owns, leases and manages commercial real estate property. The corporation provides services associated with leasing the property, including daily janitorial and rubbish removal, regular maintenance, repairs and inspection covering plumbing, electrical and drainage systems and roofing, landscaping and building improvements. Additional services include daily security services, management and control of common areas, negotiating and executing leases, settling tenant disputes, collecting rent, negotiating bank loans and insurance contracts, and performing background checks on prospective tenants.

The IRS ruled the real estate rental for this corporation wouldn't be passive investment income for this purpose. The corporation could safely make its S election without concern the election would be revoked from excessive net investment income from the rental real estate.

Note the conclusion could be different for the passive activity loss rules and the net investment income tax.

(Letter Ruling 201523008, February 4, 2015.)

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FTB loses exchange challenge.

A group of taxpayers exchanged interests in an apartment building for ownership interests in a shopping mall. The interest in the shopping mall was then transferred to an LLC (treated as a partnership for income tax reporting) after the exchange was completed.

The Franchise Tax Board tried to disqualify the exchange under the "step transaction" doctrine, because you can't exchange an undivided interest in real estate for a partnership interest. The Franchise Tax Board pointed out that a provision in the loan document for two of the four replacement parcels required the taxpayers to reorganize their tenants in common interests into a single-asset entity within seven months after acquiring the property.

The State Board of Equalization agreed with the taxpayers that the exchange of real estate didn't have to be "collapsed" with the transfer to the LLC. The taxpayers weren't legally obligated to make the transfer. For the serven months before the transfer, they negotiated leases, signed management contracts, entered into operating agreements, paid property taxes, acquired property and liability insurance, and filed federal and state income tax returns as members of a tenancy in common. There is no required holding period for replacement property.

(Appeal of Rogo Development Corp. et al., California State Board of Equializtion No. 73561 et al.)

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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 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 June and July:

June 12 and 19, 2015, Don Pollard, CLU, ChFC, Advanced Professionals, "Health care plans for small businesses update"
June 26, 2015, Michael Desmarais, attorney at law, "Your rights as a beneficiary"
July 3, 2015, Michael Desmarais, attorney at law, "Your rights as a beneficiary"
July 11 and 18, 2015, Jeffrey Hare, APC, attorney at law, "Settling legal disputes our of court"
July 25, 2015, Lori Greymont, CEO, Summit Assets Group, "Real estate investment alternatives"

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
2190 Stokes St., Suite 102
San Jose, CA 95128

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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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