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The October 2015 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

Michael Gray, CPA's Real Estate Tax Letter

October 19, 2015

© 2015 by Michael C. Gray
ISSN 1930-0387

A monthly report focusing on tax issues for the homeowner and real estate investor.

Table of Contents

It's time for year-end planning

Halloween is the "unofficial" beginning of the holiday season. The year is three-quarters over! Schedule your year-end appointment now. With vacation and celebrating holidays, the times for appointments will be very limited. Call Dawn Siemer at 408-918-3162 on Mondays, Tuesdays or Thursdays to reserve your appointment now.

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Half-price introductory offer for two new books by Michael Gray.

We are issuing 2015 updates for two books, Employee Stock Options - Executive Tax Planning and How to use Roth and IRA accounts to build a secure retirement. We expect to be able to ship the books by mid-November 2015.

You can buy the books for half price - $14.99 plus $5 shipping and handling and $1.75 California sales tax for California residents. This offer expires November 30, 2015.

To reserve your copy, call Dawn Siemer at 408-918-3162 on Monday, Tuesday or Thursday or fax the reservation forms to 408-998-2766. For Employee Stock Options - Executive Tax Planning, 2015 Edition, visit www.siliconvalleypublishingcompany.com/products/employee-stock-options-executive-tax-planning-2012-edition. For How to Use Roth & IRA Accounts To Provide A Secure Retirement, 2015 Edition, visit www.siliconvalleypublishingcompany.com/products/how-to-use-roth-and-ira-accounts-to-provide-a-secure-retirement.

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Mortgage payments were alimony.

A U.S. Bankruptcy Court reversed the IRS's disallowance of an alimony deduction for mortgage payments. In a divorce decree, the ex-wife was solely responsible for the mortgage payments for the residence. The ex-husband made the mortgage payments and applied them to his alimony obligation.

The IRS said the ex-husband was still obligated on the mortgage and only mortgage interest could be deducted.

The court held that, under the divorce decree, the ex-husband didn't have any equitable interest in the residence. The IRS had not shown that the ex-wife didn't include the payments in her taxable income.

Therefore, the alimony deduction was allowed for the ex-husband.

(Trojanowski, 2015-2 U.S.T.C. `50,487, September 18, 2015.)

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Nonrecourse cancellation of indebtedness was taxable.

Donald Dunnigan obtained a $50,000 business line of credit relating to his appraisal business.

He borrowed out the line and was unable to pay it back. In 2009, he negotiated with the lender to pay $15,628 in settlement of the debt. The lender issued Form 1099-C, Cancellation of Debt, showing $34,369.24 of debt was cancelled, and indicated that Dunnigan wasn't personally liable for repayment of the debt.

The Tax Court upheld the IRS in finding the cancellation of debt was taxable income, despite the fact that it was a nonrecourse obligation. There was no "hardship exception." The taxpayer didn't demonstrate that he was eligible for the bankruptcy or insolvency exclusions.

(Dunnigan, T.C. Memo. 2015-190, September 28, 2015.)

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Series of cash payments subject to Form 8300 reporting.

A pawnbroker made a series of loans to the same customer in the same year, who repaid them in cash (currency). The individual payments were less than $10,000, but the total during a taxable year exceeded $10,000. Do the payments have to be reported on Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business?

According to the IRS Chief Counsel, the answer is "yes." Internal Revenue Code Section 6051I(a) says that any person engaged in a trade or business who, in the course of that trade or business, receives more than $10,000 in cash in one transaction or two or more related transactions, shall file a return reporting the transactions.

In this case, the Chief Counsel said the fact the loans are separate transactions does not make them unrelated.

I am including this case in this newsletter because renters occasionally pay their rent with cash (currency). A landlord who receives more than $10,000 of cash payments from a renter during a calendar year should report those payments on Form 8300.

(CCA 201540013, April 11, 2008.)

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CEO's compensation had to be capitalized.

The Fifth Circuit Court of Appeals upheld the Tax Court and the IRS in requiring that compensation to employees, including $1,318,000 paid to the CEO, had to be capitalized as indirect production costs of a home builder.

The CEO didn't keep records of his time to substantiate that his activities didn't relate to the production of homes.

The Court of Appeals directed that this case shouldn't be published or cited as authority, but it is an indication that the IRS could be more aggressive in requiring capitalization of indirect costs under the uniform capitalization rule.

(Frontier Custom Builders, 2015-2 U.S.T.C. 50,485, September 16, 2015.)

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Out of state businesses - California Franchise Tax Board wants their $800!

In their monthly newsletter, the California Franchise Tax Board published a reminder that, although Federal Public Law 86-272 protects out-of-state business entities from being taxed by California from taxes measured by income when the sole in-state activities are limited to the solicitation of orders for goods, businesses are still subject to taxes not measured by income, including the $800 minimum tax for corporations, limited partnerships and limited liability companies.

The example is an out of state corporation that sells $1,000,000 of goods to California buyers over the internet, but has no property or payroll in California. The corporation is doing business in California, should file a California tax return and pay the $800 minimum corporate franchise tax.

("Public Law 86-272: Let's Be Clear", Tax News, October, 2015, p. 7.)

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California extension of cancellation of debt exclusion vetoed.

Governor Brown vetoed AB 99 (Perea), which would have extended California's partial conformity to the Federal exclusion of cancellation of indebtedness income relating to a principal residence through December 31, 2014. California taxpayers who had cancellation of indebtedness for their principal residence, usually from a short sale or foreclosure, must rely on other exceptions such as for insolvency or nonrecourse debt. Otherwise, the income is probably taxable on your California income tax return. See my article "Tax Consequences of a Short Sales of Real Estate vs. Foreclosure" at realestateinvestingtax.com/shortsale.shtml.

(Spidell's Flash Email, October 10, 2015.)

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Governor Brown signs California conformity bill.

Governor Brown has signed legislation (AB 154) to conform certain California tax laws with federal tax laws. A popular provision excludes cell phones from listed property. The new legislation left California's threshold for medical deductions for individuals at 7.5% of AGI and didn't adopt the federal 10% threshold.

(Spidell's Flash E-mail, September 30, 2015.)

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California enacts relief for disaster victims.

In the past, California hasn't conformed to federal rules (Internal Revenue Code Section 165(i)) allowing taxpayers who suffer disaster losses to carry them back and recover previously-paid taxes when only the Governor, but not the President has declared the disaster.

Effective for tax years beginning on or after January 1, 2014 and before January 1, 2024, California has enacted new legislation allowing a loss to be carried back when only the Governor has declared a state of emergency. The election is available when either the President of the United States or the Governor of California declares a state of emergency for a city or county in California.

A taxpayer may be able to claim the loss for the current year (of the disaster), throwback to the immediate prior year, and, if a net operating loss is created, to an additional two years of carryback of the net operating loss. Any remaining net operating loss can be carried forward.

Note that on January 17, 2014, Governor Brown declared a state of emergency in California due to the drought. Since the state of emergency didn't relate to a city or county, the disaster loss throwback treatment isn't available.

("Disaster loss deductions in California just got better", Spidell's California Taxletter, October 1, 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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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.

Return to Table of Contents

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 October and November.

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 September and October:

October 16 and 23, 2015, Paul Duren, Heritage Bank, "Small business financing"
October 30 and November 6, 2015, Professor Patricia Cain, Santa Clara University School of Law, "Tax concerns of same-sex couples and unmarried couples"
November 13 and November 20, 2015, Dick Blakeley, CEO, The Blakeley Group, "Family Wealth Education"
November 27, 2015, Lisa Barr, Silicon Valley Community Foundation, "How to promote community giving as a family value"

Financial Insider Weekly is also broadcast as follows:

  • Sunday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • 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 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
  • Monday 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
  • Monday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • 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 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
  • Thursday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • 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 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • 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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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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Subscribe or remove yourself from Michael Gray, CPA's Real Estate Tax Letter

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.

If, for any reason, you would prefer not to receive our newsletter, you can "unsubscribe" using the link below, or email us at dgsiemer@taxtrimmers.com with "unsubscribe" as the subject.

Michael Gray, CPA
2190 Stokes St., Suite 102
San Jose, CA 95128
408-918-3162

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The March 2015 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