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The May 2016 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

June 14, 2016

© 2016 by Michael C. Gray
ISSN 1930-0387

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

Table of Contents

June 15 is an estimated tax due date.

The second estimated tax payment for most individuals and calendar year corporations and fiduciaries is June 15.

For individuals, 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 2016.

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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Estimated fee payment due June 15 for some calendar year LLCs.

California LLCs pay two items to the Franchise Tax Board: an annual tax of $800 and an annual fee based on the gross receipts of the LLC. The estimated annual fee is paid with Form 3536 by June 15 of the taxable year for calendar year LLCs. There is no fee when the gross receipts for the LLC are less than $250,000. The estimated fee can be based on last year's income tax return when it is for twelve months.

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Foreign account reports are due June 30.

The due date for FinCEN 114, the report of foreign accounts for 2015, is June 30, 2016. It applies for foreign bank and brokerage accounts and certain other financial accounts exceeding $10,000 at any time during 2015 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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'Tis the season for extensions.

If you need help preparing your income tax returns for which you have filed an extension, call Dawn Siemer at 408-918-3162 on Mondays, Tuesdays or Thursdays to make an appointment.

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Michael Gray gives a LIVE seminar presentation for tax professionals.

Michael Gray will present an "Alternative Minimum Tax for Individuals Refresher" for the Tax Interest Group, Silicon Valley San Jose chapter of CalCPA. The presentation will be from noon to 1:30 p.m. on Tuesday, June 21 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 Susie Riffel at 650-522-3168 or register online at www.calcpa.org/events-and-programs/event-details?id=d439f60b-765a-42b4-9921-820e862ce27c

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IRS allowed to foreclose on property with an innocent co-owner.

The Seventh Circuit Court of Appeals upheld a federal district court in allowing the IRS to foreclose on a tax lien on property co-owned by an individual that didn't owe taxes. The taxpayers subject to the lien owed substantial federal income and employment taxes. The property was not a residence for either party, and the co-owner could either bid for the entire property or receive his share of the proceeds of the sale. The Court cited a U.S. Supreme Court decision, United States v. Rodgers, 83-1 USTC 9374, which outlined rules in such a case.

(United States v. Joyce Adent, et. al., 2016-1 USTC 50,278, May 10, 2016.)

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IRS loses! Real estate activities were not passive.

A taxpayer who was a part-time ski instructor satisfied the Tax Court that her activities were sufficient to qualify as a real estate professional and for material participation for her rental properties. Therefore, her losses were currently deductible and not subject to the passive activity limitations, as asserted by the IRS.

The taxpayer personally oversaw all rental activities and management of the rental properties. She maintained contemporaneous logs of the time that she spent on the rental properties.

The IRS raised in its brief that the hours spent travelling between her rental properties and her home should not be included in the total number of hours that she spent in real property trades or businesses. The Court refused to consider this argument because the taxpayer wasn't given the opportunity to prepare a response.

(Joseph D. Moon and Darsey C. Moon v. Commissioner, T.C. Summary Opinion 2016-23, May 23, 2016.)

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IRS Chief Counsel explains debt cancellation for business property.

The IRS Chief counsel issued advice explaining the exclusion for debt cancellation for business property. In order to qualify, the debt must have been incurred for the purchase or improvement of the property and be secured by the property. The exclusion generally applies for the excess of the indebtedness on the property over the fair market value of the property less any other qualified indebtedness on the property. Other properties owned by the taxpayer generally aren't considered. Except the amount excluded can't exceed the aggregate adjusted bases of depreciable real property, because they are reduced by the excluded amount. I'm afraid the explanation is hard to follow. The Chief Counsel gave a conclusion of the excluded amount for the case, but the figures were redacted for confidentiality.

(CCA 201623009, March 2, 2016.)

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Apartment building qualified for debt cancellation exclusion, but property held for sale to customers didn't.

The IRS has ruled that the cancellation of debt with respect to an apartment building used in a noncorporate taxpayer's leasing business qualified for the exclusion for cancellation of debt for business real property. The IRS highlighted the fact that the property was depreciable real estate.

The taxpayer also had cancellation of debt with respect to property developed for sale to customers in the ordinary course of its business. That property wasn't depreciable, similar to inventory. The IRS said that property wasn't eligible for the exclusion.

(Revenue Ruling 2016-15, June 10, 2016.)

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New overtime rules will make more employees eligible.

The Department of Labor has issued new regulations that increase the threshold for certain employees to be eligible for overtime under the Fair Labor Standards Act. The regulations are effective December 1, 2016. The details are beyond the scope of this newsletter. Please consult with a human resources expert.

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IRS changes policy for initial contact for an audit.

The IRS has changed a policy permitting initial contact with a taxpayer for an audit by telephone. Now the initial contact must be by mail. The change is in response to complaints that scammers have been calling taxpayers claiming to be IRS representatives and allowing IRS agents to make telephone calls to initiate audits was causing confusion. Now if you receive a telephone call from someone claiming to be from the IRS and it's an initial contact, not a follow up to a letter, you can be assured the caller isn't from the IRS.

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House of Representatives cuts IRS funding.

The House Appropriations Financial Services and General Government Subcommittee has issued a $10.9 billion budget for the IRS for fiscal year 2017. The bill cuts IRS funding by $236 million compared to fiscal year 2016. The current level of funding for taxpayer services is the same. This reduction doesn't make sense to me, since it's the IRS that provides the funding for our government.

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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 visitAngiesList.com/Review/4258970 in order to grade our quality of work and customer service.

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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 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"
July 1 and 8, G. Scott Haislet, attorney at law and CPA, "1031 Exchanges"
July 15, G. Scott Haislet, attorney at law and CPA, "Real estate professionals and passive activity losses"
July 22 and 29, G. Scott Haislet, attorney at law and CPA, "Sale of a principal residence"

Financial Insider Weekly is also broadcast as follows:

  • Sundays at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
  • Sundays at 1 p.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola
  • Sundays at 10:00 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
  • Mondays at 1:30 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • Mondays at 6:30 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
  • Mondays 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
  • Mondays at 7:30 p.m. on Comcast channel 15 in Saratoga
  • Tuesdays 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
  • Tuesdays at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
  • Tuesdays 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
  • Wednesdays 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
  • Thursdays at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
  • Fridays at 11:00 a.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola.
  • Fridays at 3:30 p.m. on KCAT, Comcast channel 15 in Los Gatos
  • Fridays at 4:00 p.m. on KMTV cable channel 15 in Cupertino, Los Altos and Mountain View
  • Fridays at 6:00 p.m. on Comcast and Astound channel 29 in San Francisco. Online streaming video at www.bavc.org, "public access TV"
  • Fridays 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
  • Saturdays 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
  • Saturdays at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27.
  • Saturdays 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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The May 2016 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