Michael Gray, CPA's Real Estate Tax Letter

September 22, 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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Extended individual income tax returns are due October 16

Does your tax return preparer have your information to prepare your income tax returns yet? (Congratulations to those who have already filed their income tax returns!)

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Hurricane relief for extensions, estimated tax payments

The IRS has announced that victims of Hurricane Harvey who have extended the due date for filing their 2016 individual income tax returns have a further extended due date of January 31, 2018. The due date of 2017 estimated tax payments of Hurricane Harvey victims that are normally due on September 15, 2017 and January 15, 2018 have also been extended to January 31, 2018.

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Another tax break for hurricane relief

Employees who are Huricane Harvey victims can exclude from taxable income amounts received from their employers for uninsured personal, family, living, or funeral costs and for home repair expenses.

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Mortgage brokers aren't real estate professionals.

The Tax Court upheld the IRS in finding mortgage brokers aren't real estate professionals. Mortgage brokerage is not a real estate trade or business because it doesn't involve the operation of real property or the brokerage of real estate.

In this case, the taxpayer had three rental properties, and was unable to show that he spent more than 750 hours and more than one-half of his time managing the properties.

Therefore, the taxpayer met none of the tests to be considered a real estate professional, and losses from the rental properties were subject to the passive activity loss limitations.

(Hickam v. Commissioner, T.C. Summary Opinion 2017-66, August 17, 2017.)

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Tax Court disallows premiums paid to a micro-captive insurance company.

The Tax Court found a micro-captive insurance company didn't operate as an insurance company, and disallowed premiums paid to it by related business. The investments of the company were illiquid, long-term related party loans, principally used to purchase real estate. The Court said the insurance company didn't insure a sufficient number of risks to be properly diversified. The Court also said the insurance policies were "less than a model of clarity."

Closely held businesses that insure some of their risks using a micro-captive insurance company should review their operations with their tax advisors and legal counsel in light of this decision.

(Avrahami v. Commissioner, 149 T.C. No. 7, August 21, 2017.)

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Out of state investor penalized for not filing.

An S corporation that was located outside of California invested in a partnership with some operations in California underneath another venture fund. The S corporation didn't file a California tax return. It claimed it was unaware of the operations in California, and had a reasonable cause for not filing the tax return.

The California State Board of Equalization ruled against the taxpayer. The Board said, "an ordinarily intelligent and prudent business person would have undertaken efforts and conducted research to determine the tax consequences of its investments, and (the taxpayer) has not presented evidence of any efforts on its part to undertake such actions."

Since entities such as C corporations, S corporations, partnerships and most LLCs pay minimum California taxes, this is a particular problem for them. S corporations, partnerships and most LLCs also have per owner penalties.

Certain out-of-state investors may be able to argue they aren't required to file if:

(Appeal of the MYTA Corporation, State Board of Equalization Case No. 824316, July 28, 2015, released June 20, 2017. Spidell's Califonria Taxletter®, September, 2017, p. 1. "Out-of-state investor unaware of California income required to file.")

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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 weekday mornings to make an appointment. Remember, there are only two months left to submit your extended 2016 individual income tax return on time!

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Property tax appeal date approaches.

Owners of California real estate may have already received or will soon receive notices of assessed value from the county assessors.

When the county assessor mailed assessment notices to property owners by August 1, 2017, the period to appeal began on July 2, 2017 and ends on September 15, 2017. This filing period applies for Alameda, Alpine, Inyo, Kings, Placer, San Francisco, San Luis Obispo, Santa Clara, Sierra and Ventura counties.

For all other counties, the appeals period ends November 30, 2017.

Here is a link to a video the California State Board of Equalization has prepared to help taxpayers file appeals: www.boe.ca.gov/info/AssessmentVideo/Index.html.

For this year, the appeal is based on the value of the property on January 1, 2017.

(Spidell's California Taxletter®, September, 2017, p. 11, "Appealing property tax assessments".)

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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 past episodes

After eight years of production, I have discontinued producing new interviews for Financial Insider Weekly. Doing the show has been a rewarding experience and I consider back episodes to be my legacy of financial literacy education to our community. Back episodes are now on our home page at www.financialinsiderweekly.com.

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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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Check out my blog.

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

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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.

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Michael Gray, CPA
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