Michael Gray, CPA's

Real Estate Tax Letter

Michael Gray, CPA's Real Estate Tax Letter

May 9, 2016

© 2016 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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Does your tax return need a second look?

There's an old story about two barbershops having a price war. Finally, one of the barber shops posted a sign, "$2 haircuts fixed, $10." If you have an uncomfortable feeling about tax returns prepared for you last tax season (especially with stock option transactions), it might be worthwhile to let us have a second look at them. Call Dawn Siemer at 408-918-3162 on Mondays, Tuesdays, or Thursdays to make an appointment.

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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 2015 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 2015 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 2016.

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

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Annual payment for some LLCs is due June 15.

Limited liability companies doing business in California that have more than $250,000 of gross income are required to pay an annual "fee". The amount of the fee depends on the level of gross income for the LLC. When the LLC has a calendar reporting year and there was a fee on its 2015 California income tax return, an advance payment of the 2016 fee is due June 15, 2016. If you have any questions about this matter, ask your tax advisor or call Michael Gray at 408-918-3161.

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Mortgage broker doesn't qualify as a "real estate professional."

Rodney Guarino has a master's degree in tax law and is an enrolled agent with the Internal Revenue Service.

During 2008, he operated a business, Westoaks Financial. He was a licensed real estate broker and brokered real estate mortgages in addition to providing tax return preparation services.

Rodney and his wife, Lauraine, also had rental properties for which they claimed tax losses as real estate professionals.

Rodney said he wasn't subject to the passive activity loss limitations because he was a real estate professional. He claimed he worked more than 750 hours in the real estate mortgage business and that was more than any other business activity that he had.

The Tax Court ruled that Rodney's mortgage brokerage business wasn't a real estate activity, but a financial services company. Therefore, the Guarinos didn't qualify as real estate professionals and their real estate losses were suspended passive activity losses.

Rodney also received back $39,000 of a total of $40,000 broker fee paid relating to the purchase of a home from Platt, a real estate brokerage company. Platt was owned by Rodney's brother in law.

Rodney reported the $39,000 on his Schedule C for Westoaks Financial, with an offsetting $39,000 tax deduction because he believed the payment should be treated as a rebate relating to the purchase of the home and subtracted from the tax basis.

The IRS disallowed the deduction and said the $39,000 should be subject to self-employment tax.

The Tax Court ruled the $39,000 should have been reported as "other income", not on Schedule C and that it wasn't subject to self-employment tax.

In consideration of Rodney's education and professional status, the Tax Court upheld the IRS in assessing accuracy penalties on the Guarinos. It was surprising how poor the records appeared to be considering that Rodney was a tax professional.

(Guarino, T.C. Summary Opinion 2016-12, March 14, 2016.)

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Tax Court disallows estate exclusion of family partnership transfers.

An individual transferred marketable securities to a family limited partnership, and transferred interests in the partnership to her children. After her death, the IRS included the transferred partnership interests in her taxable estate. The Tax Court ruled in favor of the IRS. The Tax Court found there was an implied agreement that the decedent retained the right to the possession or the right to the income from the transferred property.

(Holiday Estate, T.C. Memo. 2016-57.)

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Basis consistency report deadline extended again.

A provision of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 requires that the basis of property acquired from a descendent not exceed the value for purposes of the estate tax imposed on the decedent's estate. A report is supposed to be filed within 30 days after the estate tax return is due. The requirement applies for estate tax returns due after July 31, 2015. The IRS has administratively extended the due date for the report from March 31, 2016 to June 30, 2016.

(Notice 2016-27.)

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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 and siliconvalley.citysearch.com.

We use Angie's List to assess whether we're doing a good job keeping valued customers like you happy. Please visit AngiesList.com/Review/4258970 in order to grade our quality of work and customer service.

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Financial Insider Weekly broadcast schedule for May and June.

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 May and June:

May 13, Greg Carpenter, business broker, "Selling a business"
May 20 and 27, Bettie Baker Marshall, Attorney at Law, "Legal concerns when caring for an incapacitated friend or relative"
June 3 and 10, David Howard, Attorney at Law, "Reporting requirements for foreign bank and investment accounts"
June 17, Sharon Lacy, CFP®, CPWA®, United Capital Financial Advisors, "Social Security basics"
June 24, Sharon Lacy, CFP®, CPWA®, United Capital Financial Advisors, "Social Security concerns for married couples"

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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