Michael Gray, CPA's Real Estate Tax Letter

December 13, 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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Status of Tax Reform legislation

The House of Representatives has passed its version of the Tax Cuts and Jobs Act. The Senate passed its version on Saturday, December 2. Now that both houses of Congress have passed their versions, Tax Reform legislation is virtually certain to eventually pass. Congress is reconciling the differences in the legislation.

One of the surprises in the Senate bill that relates to stock options is to keep the individual alternative minimum tax with a higher exemption and higher exemption phaseouts. This was a budget-oriented change adopted after the Senate Finance Committee passed its proposal that would have repealed the alternative minimum tax.

When the legislation passes, I'll issue a summary of the major provisions. Some of the provisions could still change.

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Fourth quarter estimated tax payment for non-corporate taxpayers is due January 16

The final estimated tax payment for individuals and calendar-year estates and trusts is due January 16, 2018. (Martin Luther King Day will be observed on January 15.) Remember California taxpayers with taxable income of $1 million or more must pay their estimated taxes using the current year's facts.

Consider making the state tax payment by December 31, 2017 for a 2017 tax deduction. Watch the alternative minimum tax. If tax reform passes, paying by the year end will be even more important, because the deduction would be repealed for 2018.

See your tax advisor.

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Should you make additional tax payments before December 31?

State estimated tax payments and early property tax payments made by December 31 are generally tax deductible for the regular tax. However, many people are finding they are subject to the alternative minimum tax. Deductions for taxes (and miscellaneous itemized deductions) aren't allowed for the alternative minimum tax, so there could be no benefit for a tax prepayment. A tax advisor can project your tax picture to determine if the AMT will apply. Turbo Tax and other tax preparation software can also be used to make the computations.

This situation has changed somewhat because of the 3.8% net investment income (NII) tax. Part of the state tax payment may be a "good" deduction for the NII tax even though there is no AMT benefit. See your tax advisor.

Under tax reform, the deduction for state income tax would be repealed and the deduction for real estate taxes would be reduced or repealed.

See your tax advisor.

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Should you donate appreciated publicly traded stock?

It's the season for giving. Many of us make extra donations during December to share our bounty with others. Appreciated publicly-traded stock that has been held for more than a year is an ideal asset for a donation. Under the Internal Revenue Code, the long-term capital gain is excluded from taxable income and the charitable contribution deduction is the fair market value of the stock, so there is a double tax benefit. Also, publicly traded stock isn't subject to the appraisal requirements that apply to other property. It's a win-win-win! Remember to get a good acknowledgement letter to document the donation, including a statement that "no goods or services were received in exchange for the donation."

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Donating a car to charity?

Remember that an appraisal is required for noncash contributions with a value exceeding $5,000. See Form 8283 and instructions as the IRS web site, www.irs.gov. (There is a Declaration of Appraiser on the form.) There is an exception to the rule for vehicles donated to a charity. If the charity sells the car, the taxpayer may rely on the sales price disclosed on Form 1098-C. The original Form 1098-C is submitted to the IRS with your income tax return (or otherwise sent to the IRS with Form 8453 if you efile).

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Should you accelerate tax deductions?

With a proposed increase in the standard deduction and proposed repeal of many tax deductions, including tax return preparation fees, it might be advantageous to accelerate tax deductions, such as medical expenses, mortgage interest, tax return preparation fees, asset management fees, and certain legal fees into 2017. The tax rate for the reduced income might also be lower next year under tax reform than the current tax rate for 2017.

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Real estate professional status fails.

A urologist and his wife claimed to be real estate professionals. The Tax Court upheld the IRS in disallowing real estate professional status and suspending the taxpayers' passive activity losses. The taxpayers failed to provide documentation acceptable to the court for satisfying the 750-hour and 500-hour tests. One of the activities was a medical center for which the urologist was a limited partner. He claimed to provide more than 500 hours of management consulting services to the limited partnership, but the court said there was no credible evidence for those hours. The urologist demonstrated his reduced workload in his medical practice because of an injury to his hands, but that wasn't sufficient for the court to accept material participation in the real estate activities. His wife was the individual who was supposed to have met the hours worked requirements, but she was only able to provide ballpark estimates of the hours worked, and didn't keep contemporaneous records.

The case again shows that real estate professional status isn't a "slam dunk."

(Syed v. Commissioner, T.C. Memo. 2017-226, November 16, 2017.)

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Casualty loss allowed for certain deteriorating concrete foundations.

The IRS has issued a revenue procedure providing a safe harbor for individuals whose personal residence has a deteriorating concrete foundation containing the mineral pyrrhotite. The loss should be claimed on the tax return for the year the payment is made for the repairs to the foundation. Usually these deductions require a "sudden" event, such as fire or flood. Note that under tax reform proposals, casualty loss deductions would be repealed after 2017, so 2017 might be your last chance to claim this deduction.

(Revenue Procedure 2017-60, November 22, 2017.)

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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 available at https://www.youtube.com/user/financialinsiderweek.

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Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter.

For your questions about dependent exemptions, see IRS Publication 501 at www.irs.gov.

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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.

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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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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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