Michael Gray, CPA's

Real Estate Tax Letter

Michael Gray, CPA's Real Estate Tax Letter

July 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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The year is half over!

Time is sneaking by us again! How is 2015 going for you? Is there any way we can help you reach your goals? How is your tax picture shaping up this year? Call Dawn Siemer at 408-918-3162 or Michael Gray at 408-918-3161 to make a planning appointment now.

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Dawn Siemer out of office.

Dawn Siemer will be out of the office from July 13, returning August 3. Please be patient with us while she's away. It's best to call Michael Gray directly at 408-918-3161 until she returns.

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Michael Gray out of office.

Michael Gray will be out of the office on July 13 and 14, returning July 15. He will respond to messages when he returns.

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Health care reform is here to stay.

In its second ruling supporting federal health care reform, the Supreme Court ruled in the King decision that the federal government's subsidies of health care premiums for participants in states using a federal exchange instead of setting up their own exchanges are legal. If the Court had ruled against the subsidies, most commenters believe the health care reform legislation would have fallen because many people couldn't have afforded to pay their premiums.

Since millions of people are now insured that couldn't get health care insurance before, I believe it's highly unlikely the legislation will be repealed even if we have a Republican President and Congress. (Last week was a very good week for President Obama.)

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Same sex marriages are now legal throughout the United States.

In what was probably the most historic Supreme Court ruling since approving inter-racial marriages during the 1960's, the Supreme Court ruled in Obergefell that same-sex marriages are guaranteed by the Fourteenth Amendment to the United States Constitution.

Since the majority of states have already legalized same sex marriages, it appears this is an idea whose time has come.

From a tax perspective, our national tax system is now greatly simplified because everyone can now file their state income tax returns with the same status as married or not consistently with how they file their federal income tax returns.

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Trade bills include information return penalty increase.

On June 29, President Obama approved the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (HR 2146) and the Trade Preferences Extension Act of 2015 (HR 1295).

The Trade Preferences Extension Act includes changes of the penalty structure for annual information returns, such as Forms 1099, effective for information returns required to be filed and furnished after 2015. The penalty for a single failure is increased from $100 to $250, with a maximum penalty for all failures increased from $1.5 million to $3 million. If a failure is corrected within 30 days of the required filing date, the penalty for a single violation would increase from $30 to $50, with a maximum penalty for all such failures increased from $250,000 to $500,000.

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Health care penalty reinstated?

There is a $100 per day per employee potential penalty for violating the employer health care rules. According to the IRS, the penalty may apply if an employer provides health care coverage for employees using private health care coverage instead of a group health care plan. This penalty was temporarily waived for employers with fewer than 50 full-time employees through June 30, 2015. There are proposals in Congress to eliminate the penalty for small employers, but whether it will be eliminated or the waiver will be further extended is uncertain. We have suggested that clients who have provided such coverage discontinue the practice and investigate adopting a group plan.

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Gain from sale of property was ordinary income, not capital gain.

A building was acquired and held in a limited partnership with plans to develop it. Although the partnership didn't make substantial improvements to the property, there were substantial efforts to secure the financing for developing it and having architectural studies, etc. $1,828,982 was capitalized as construction in progress.

The partnership received an unsolicited offer to purchase the property. The sale amount included an amount for participation in home sales by the buyer.

The majority owners of the partnership reported the gain as a long-term capital gain of investment property.

The Tax Court upheld the IRS in finding that gain was ordinary income. The property was always held with the intention of developing it. The fact that the partnership didn't frequently sell properties wasn't a controlling factor.

(Fargo, T.C. Memo. 2015-96, May 26, 2015.)

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Payment to reduce rent was rental income for lessor.

As part of a 10-year lease, the lessee was given the option to pay at the inception $1 million to reduce its monthly rent payments. The lessee initially issued a Form 1099 MISC to the lessor, including the $1 million as rent. Later, a "corrected" Form 1099 was issued, eliminating the $1 million as rent.

The lessor reported total rental income including the $1 million payment, but then subtracted $1 million as a "contribution to construction."

When the IRS contested eliminating the payment as income, the taxpayer took the alternative position that the $1 million amount received was prepaid rent and should be amortized over the 10-year term of the lease.

The Tax Court upheld the IRS in finding the payment was taxable as rental income in the year received. The lease didn't specify that the payment was prepaid rent allocable to the ten-year period. The Tax Court also upheld the IRS in assessing an accuracy penalty for underreported income.

(Stough, 144 T.C. No. 16, June 2, 2015.)

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Taxpayer fails real estate professional status.

The Tax Court ruled against a taxpayer who claimed real estate professional status. Although the taxpayer documented 764 hours of claimed participation in the real estate activity, he hired a management company to manage the properties located outside his state of residence and a real estate company to find the tenants for another property. The Court said the participation documented by the taxpayer was investor activities, such as researching acquiring other properties and refinancing the properties. The Court said the investor activities weren't treated as participation. Participation would be operational activities, such as finding tenants and overseeing repairs and maintenance of the properties.

(Padilla, T.C. Summary Opinion 2015-38, June 29, 2015.)

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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 July and August.

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 July and August:

July 10 and 17, 2015, Jeffrey Hare, APC, attorney at law, "Settling legal disputes our of court"
July 24 and 31, 2015, Lori Greymont, CEO, Summit Assets Group, "Real estate investment alternatives"
August 7 and 14, 2015, Nancy Ross, Bauer Shepherd & Ross & Associates, "How a collaborative approach can make divorce a less painful process"
August 21, 2015, Janis Carney, attorney at law, Carney Elder Law, "Senior Estate Planning"
August 28, 2015, Janis Carney, attorney at law, Carney Elder Law, "Caring for seniors today: challenges in getting quality care"

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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If you would like to subscribe to our newsletter, fill out our form at http://www.realestatetaxletter.com, or email us at dgsiemer@taxtrimmers.com with "subscribe" as the subject. Be sure to include your name and email address.

We do work hard at producing this newsletter, and intend for it to provide meaningful and helpful information. If you have any comments or suggestions, email us at dgsiemer@taxtrimmers.com.

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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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