Michael Gray, CPA's Real Estate Tax Letter

October 18, 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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Northern California wildfire victims get filing relief.

The IRS has announced that victims of Northern California wildfires who have extended the filing date for their 2016 income tax returns will receive an additional extension of time until January 31, 2018 to file their income tax returns. California automatically conforms to that postponement period.

The relief applies to:

Taxpayers with an address of record with the IRS in a disaster area will automatically receive relief. Other qualifying taxpayers must contact the IRS at 866-562-5227 for relief. California taxpayers should call the Franchise Tax Board. Tax practitioners can call the Franchise Tax Board's Practitioner Hotline at 916-845-7057.

The IRS is also waiving late deposit penalties for federal payroll and excise tax deposits normally due after October 8 and before October 23 provided the deposits are made by October 23.

Note that Orange County fire victims currently don't qualify for this relief and will have to request penalty abatement for a reasonable cause if they file late.

(IR-2017-172, Revenue and Taxation Code Section 18572.)

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The year will soon be over. Will you be ready?

It's time for year end tax planning. With the holidays, Michael Gray's availability will be limited. Call Dawn Siemer weekday mornings at 408-918-3162 to schedule your year-end tax planning appointment now.

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Republicans issue tax reform framework.

The Trump Administration and the Republican leadership in Congress have released a framework for tax reform on September 27. The framework is still very sketchy. I have written an article, Are you a winner or a loser under tax reform? Here is the URL for the blog post: www.michaelgraycpa.com/posts/winner-loser-tax-reform

(Unified Framework for fixing our broken tax code.)

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Congress and President enact hurricane relief.

Congress has passed and President Trump has signed legislation providing tax relief to victims of the recent hurricanes. Among other provisions, the Act allows qualified taxpayers to deduct personal casualty losses without regard to the 10% floor and allows the deduction to those who claim the standard deduction. The Act also waives the early distribution penalty for qualified taxpayers withdrawing funds from their retirement accounts. (Remember many states, including California, do not automatically conform to federal tax changes. So far, California hasn't adopted these changes.)

(Disaster Relief Act of 2017.)

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New per diem rates announced.

The IRS has announced per diem travel rates, generally effective for travel on or after October 1, 2017. The per diem rate for lodging and meal and entertainment expenses in high cost areas is $284 per day, and $191 for other areas. The per diem rate for meals and incidental expenses is $68 per day for high cost areas and $57 for other areas within the continental United States. The per diem rate for incidental expenses, such as tips for porters and baggage carriers, is $5 per day.

(IRS Notice 2017-54, September 25, 2017.)

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Rental income wasn't self-employment income.

The Tax Court ruled against the IRS's claim that rental income received by a farmer was self-employment income. The Tax Court said there wasn't a "nexus" between payments from renting farmland and the agricultural arrangement requiring the farmer's material participation.

(Martin v. Commissioner, 149 TC No. 12, September 27, 2017.)

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Rental losses disallowed for vacation property.

A married couple owned a home in Carmel, California. During 2011 and 2012, they used the home personally 30 times and rented it six times. They claimed the wife was a real estate professional and that she devoted 913 hours in 2011 and 850 hours in 2012 to managing the property.

The Tax Court upheld the IRS in finding the wife's time was not devoted to the business use of the property, but to their personal use. Some of the time was for computer classes unrelated to the property and to haircuts and other personal activities. Considerable time was for attending city council meetings, but the court said these related to their personal concerns to avoid residential development by the home. The court felt 315 hours relating to tax return preparation was excessive, because their tax returns were prepared by a tax professional, and the portion of the time relating to the rental wasn't identified. She also failed to maintain contemporaneous records supporting her status as a real estate professioinal.

Therefore, the wife didn't qualify as a real estate professional, so any allowed losses were suspended passive activity losses.

The Tax Court also upheld the IRS in disallowing most of the expenses relating to the property as non-deductible personal expenses.

(Simonelli v. Commissioner, T.C. Memo. 2027-188, September 26, 2017.)

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IRS exam staffing falls, resulting in fewer tax audits.

The Treasury Inspector General for Tax Administration has reported the number of auditors employed by the IRS during 2016 reached a 20-year low. Fewer auditors results in fewer audits.

The examination staff level was 8,847 employees for 2016, 23% lower than 11,432 employees for the fiscal year 2012.

(TIGTA Ref. No. 2017-30-072.)

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IRS kills proposed valuation regulations.

On October 2, 2017, the Department of the Treasury issued its second report to the President on Identifying and Reducing Tax Regulatory Burdens. One of the recommendations was to abandon proposed regulations under Internal Revenue Code Section 2704, which would have severely curtailed valuation discounts for family transfers. Estate planning attorneys and other tax advisors are having a collective sigh of relief.

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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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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
2190 Stokes St. Ste. 102
San Jose, CA 95128
(408) 918-3162
FAX: (408) 998-2766
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