Michael Gray, CPA's Real Estate Tax Letter

February 10, 2017

© 2017 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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Have you received your tax preparation materials?

If you haven't received a tax data organizer or instructions to submit information using the Tax Notebook and want us to prepare your income tax returns, please call Dawn Siemer at 408-918-3162 on Monday, Wednesday or Friday.

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Make your tax return preparation interview appointment now.

Most personal interview appointments for preparing 2016 individual income tax returns will be scheduled in February. Many clients send their information without having an interview, but if you need that personal attention, you should schedule your interview appointment now. Call Dawn Siemer Monday, Wednesday or Friday at 408-918-3162.

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Another taxpayer fails to qualify as a real estate professional.

Alvin Jones had an insurance agency but claimed to be a real estate professional. He owned and managed 10 single family homes in 2011 and 11 in 2012. He spent considerable time complying with the requirements for Section 8 housing.

The IRS disallowed the current deduction of real estate losses for Mr. Jones because they said he didn't qualify as a real estate professional. A requirement to qualify is that the taxpayer must spend more time on real estate activities than any other activity. The IRS said Mr. Jones spent more time on his insurance business than on his real estate business.

Although Mr. Jones kept pretty good records of his real estate activities, he didn't keep extensive records of his activities in his insurance business. He was paid for 519.99 hours of work during 2011 and 173.33 hours during 2012. He employed three people, including an agency manager, in his insurance business during 2011 and 2012. He admitted he wasn't compensated for all of the time that he spent relating to the insurance business, and he reported driving 17,742 and 19,777 business miles in connection with the insurance business for 2011 and 2012.

The Tax Court ruled that since Mr. Jones didn't keep adequate records for his insurance business activities, he failed to establish that he spent more time on the real estate business than the insurance business. The Tax Court upheld the IRS in disallowing current deductions for Mr. Jones's real estate losses.

This case first highlights again the difficulty of defending real estate professional status when a taxpayer has another occupation. If Mr. Jones's wife didn't have another occupation and she managed the family's real estate operations, the couple might have qualified.

Another significant point is most tax advisors tell their clients who want to qualify as real estate professionals to keep a diary or log of their real estate activities. They should also tell those clients to keep a diary or log of their activities relating to any other occupation they might have. This is a very onerous requirement that most businesspersons won't want to comply with. They chose to be self-employed for freedom, not to spend all of their time keeping logs or diaries.

(Jones, T.C. Summary 2017-6, February 7, 2017.)

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IRS updates guide for cost segregation.

The IRS recently released an update to its Audit Techniques Guide on Cost Segregation. Since the Guide is used by IRS agents when auditing cost segregation studies, those who perform such studies will want to be familiar with it.

Cost segregation is a way to break down the cost of items, most popular for real estate, to allocate the depreciable cost into categories with the most favorable depreciable lives. It is even more important now that taxpayers can elect to expense the undepreciated cost of a component of real estate when it is replaced.

You can find the updated Audit Techniques Guide at https://www.irs.gov/businesses/cost-segregation-audit-techniques-guide-table-of-contents.

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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 February and March.

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 February and March:

February 3 and 10, Mark Erickson, attorney at law, "California divorce basics"
February 17, Mark Erickson, attorney at law, "California spousal and child support - Part 1 of 2"
February 24, Mark Erickson, attorney at law, "California spousal and child support - Part 2 of 2"
March 3 and 10, Martin Schainbaum, attorney at law, "I'm being audited by the IRS! Now what?"
March 17, Martin Schainbaum, attorney at law, "Appealing your IRS audit"
March 24 and 31, Martin Schainbaum, attorney at law, "I owe the IRS! Now what?"

Financial Insider Weekly is also broadcast as follows:

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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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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