Michael Gray, CPA's Real Estate Tax Letter

November 18, 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

'Tis the season for year-end planning.

There is onlyt a month and a half remaining for 2016. Make your year-end planning appointment now. Call Dawn Siemer on Mondays, Wednesdays or Fridays at 408-918-3162.

Return to Table of Contents

The Trump presidency and taxes.

The election of Donald Trump as President of the United States promises tax benefits for real estate investors. For example, tax deferred exchanges were threatened to be curtailed by President Obama. I think we can say they are safe during Trump's term of office.

We sent a summary of Trump's tax proposals to subscribers of this newsletter. If you need a copy, call Dawn Siemer at 408-918-3162 or send her an email to dgsiemer@taxtrimmers.com.

Trump's tax proposals include repealing the 3.8% net investment income tax and the alternative minimum tax. Both of those changes will help many investors and homeowners when they sell their real estate. The net investment income tax for net rental income of passive real estate investors would be eliminated. The alternative minimum tax resulting from disallowance of the itemized real estate tax deduction when computing the alternative minimum tax would also be eliminated.

Trump has also proposed increasing the standard deduction to $15,000 for singles and $30,000 for married persons filing joint income tax returns. These higher standard deductions could eliminate the tax benefits of deductions for mortgage interest and property taxes in areas where real estate is modestly priced. In Silicon Valley, buying a home often means a purchase price of $1 million or more, so the interest, property taxes plus state income taxes will likely exceed the standard deduction for new homeowners here.

The proposed maximum tax rate for business income would be 15%. It's unclear whether this rate would apply to real estate rental income.

A big change for very high net-worth taxpayers is the proposed repeal of the federal estate tax. This change would eliminate the threat to family partnerships of IRS proposals under Internal Revenue Code Section 2704. Family partnerships would probably lose a lot of their popularity with the change, but remember Congress could reinstate the estate tax under a later regime.

Some of the revenue loss from the estate tax repeal would be made up with carryover basis. The "step up" or fresh start for tax basis of inherited property would be limited to only $5 million of property for singles or $10 million for a married couple. This means it will be even more important to keep documents for the acquisition of property, including the closing statement for buying real estate, in a place where your successors can find them.

Remember these are only proposals. Trump's proposed changes would generate significant deficits, so there will probably be a lot of negotiation and compromise in enacting tax reform. I expect tax reform will be enacted during the Trump administration, but the actual details have yet to be determined.

Also remember Trump's presidency might only last four years. A later Congress and President could reverse any changes that are enacted.

Return to Table of Contents

Ceiling for Social Security wages increased.

The Social Security Administration has announced that the maximum earnings subject to Social Security tax will increase from $118,500 for 2016 to $127,200 for 2017.

The threshold where a household employee becomes subject to employment taxes (the "nanny tax") will remain at $2,000.

(SSA News Release, October 18, 2016.)

Return to Table of Contents

Some retirement plan limits increased.

The IRS has announced the retirement plan limits for 2017. The maximum contribution to an IRA remains at $5,500 with a catch-up contribution limit for those age 50 and over of $1,000. The maximum contribution for 401(k) plans remains at $18,000 with a catch-up contribution limit for those age 50 and over of $6,000. The maximum contribution for defined contribution plans, including SEPs, is increased from $53,000 to $54,000. The maximum benefit for a defined benefit plan is increased from $210,000 to $215,000.

(IR-2016-141, Notice 2016-62.)

Return to Table of Contents

First real estate tax payment due date is December 10.

Remember to make your first real estate tax payment by December 10 to avoid a nasty penalty. Some people like to pay the full amount to accelerate the tax deduction for the second installment. Before doing so, check whether you are subject to the alternative minimum tax for 2016, which eliminates the tax benefit.

Return to Table of Contents

LLC member was subject to self employment tax.

The IRS Chief Counsel has advised that the majority owner of an LLC restaurant franchise was subject to self-employment tax. This LLC was treated as a partnership for income tax reporting purposes. The other owner for the LLC was the taxpayer's wife and her irrevocable trust, and they were not actively involved in the business. The taxpayer was actively involved in operating the business. On the partnership's income tax return, only the guaranteed payments (salary) of the taxpayer was treated as subject to self employment tax. He was treated as a limited partner, not subject to self employment tax for his allocated share of the earnings of the LLC. The partnership claimed the other income should be treated as a return on the taxpayer's capital investment and shouldn't be subject to self-employment tax.

The IRS Chief Counsel said the taxpayer's active participation in the LLC precluded him from being considered a limited partner. He was not merely an investor in the business.

(Chief Counsel Advice 201640014, June 15, 2016.)

Return to Table of Contents

Remember the new W-2 deadline.

The IRS reminds employers that 2016 Form W-2s must be filed by January 31, 2017. The same deadline applies when the forms are electronically filed.


Return to Table of Contents

Partnership agreements possibly should be updated.

During 2015, the IRS issued final regulations relating to how to allocate income and deductions when there is a change in ownership of a partnership interest; such as a sale, inheritance or gift; during a tax year. The default rule is a cutoff method, but these items could also be prorated based on the days of ownership during the year. This creates a conflict between the owners of the interest at the beginning and the end of the year. The cutoff method could also be more expensive because it requires an interim closing for the partnership (including most LLCs).

The regulations are effective for tax years beginning on or after August 3, 2015.

We recommend you discuss with legal counsel whether your partnership agreement should be updated to address this issue in advance.

(T.D. 9728, August 3, 2015.)

Return to Table of Contents

Regulations issued for partnership disguised sales.

When a partner contributes property to a partnership and then takes a cash distribution within two years, it is presumed that there was a disguised sale and the transaction must be recharacterized. The IRS has issued final, temporary and proposed regulations to clarify these rules. Under the regulations, almost all partnership debt is treated as nonrecourse debt for this purpose. There are also provisions to disregard "bottom dollar guarantees."

If you contemplate such a transaction or have participated in such a transaction, you should consult with your tax advisor about the implications of these new regulations.

(T.D. 9787, T.D. 9788, October 5, 2016.)

Return to Table of Contents

IRS guidance issued for partnership recourse debt.

The allocation of recourse debt is important because it is treated like a cash investment in a partnership for the limitation of deducting partnership losses. The IRS has issued re-proposed regulations relating to whether a debt qualifies as recourse and how it should be allocated. Taxpayers may optionally rely on these proposed regulations. If you are a partner in a partnership that generates losses, you should consult with you tax advisor about how these regulations might affect you. The proposed regulations also apply for single member disregarded entities (single member LLCs).

(REG-122855-15, October 5, 2016.)

Return to Table of Contents

Taxpayer's valuation of a conservation easement is sustained.

The Eleventh Circuit Court of Appeals sent a case back to the Tax Court, saying the IRS's method of valuing a conservation easement was in error. The IRS tried to revalue the property for the declining real estate market. The Tax Court found the IRS didn't base its valuation on comparable sales, as required by the Eleventh Circuit. Therefore, the taxpayer's appraised value of $24 million was accepted.

(Palmer Ranch Holdings Ltd, supplementing TC Memo 2014-79.)

Return to Table of Contents

Deduction denied for façade easement.

A federal district court disallowed a deduction for the charitable contribution of a preservation easement in the fa├žade of a building that it owned. The deed allowed the taxpayer to have additional construction on part of the façade, subject to approval by an architectural preservation trust. A deduction isn't allowed under the Interal Revenue Code when such construction is permitted after the donation.

(Partita Partners LLC, 2016-2 U.S.T.C. 50,452, October 25, 2016.)

Return to Table of Contents

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 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.

Return to Table of Contents

Financial Insider Weekly broadcast schedule for November and December.

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 November and December:

November 18 and 25, Rebecca Dupras, Esq., Silicon Valley Community Foundation, "Why and how to promote charitable giving in your family"
December 2 and 9, 2016, William D. Mahan, attorney at law, "Why you need a will"
December 16, 2016, William D. Mahan, attorney at law, "Tax considerations of title"
December 23 and 30, 2016, Phil Price, EA, The Price Company, "Qualified retirement plans for small businesses"

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!

Return to Table of Contents

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.

Return to Table of Contents

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+.

Return to Table of Contents

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

Return to Table of Contents

Check out my blog.

I have also started a blog at michaelgraycpa.com. Check it out!

Return to Table of Contents

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.

Return to Table of Contents

Subscribe to the Real Estate Tax Letter

Did you find this newsletter helpful? If so, subscribe now!

Return to Table of Contents

Michael Gray, CPA
2482 Wooding Ct.
San Jose, CA 95128
(408) 918-3162
FAX: (408) 938-0610
Hours: 8am - 5pm PDT Monday - Friday

Find us on Facebook
Follow me on Twitter
Connect on LinkedIn
Connect on Google+
Our Blog
© 2018

Subscribe to Michael Gray, CPA's
Tax & Business Insight

We respect your email privacy