Michael Gray, CPA's Real Estate Tax Letter

January 9, 2018

© 2018 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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Changes for my CPA firm.

As of January 1, 2018, I have sold my CPA practice to Ms. Thi Nguyen, MST, CPA with Koehler & Associates, CPAs, Inc. I will continue to work with Koehler & Associates in serving clients, when they need me.

I will also continue sending my newsletters for this tax season.

Thi's telephone number is 408-286-7400, extension 206, and her email address is thi@koehlercpa.com. The address for Koehler & Associates is 1541 The Alameda, San Jose, CA 95126. The direct telephone numbers to Dawn and me are unchanged at 408-918-3162 and 408-918-3161. My new mailing address is 2482 Wooding Ct., San Jose, CA 95128.

This is a succession planning move, for the protection of my clients and my family. If you have a business, I hope you have a similar plan in place. I am doing this while I am still healthy to help ease the transition.

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LIVE seminar on new tax law highlights.

The Silicon Valley, San Jose Chapter of the California Society of CPAs will have a live seminar on "Highlights of the Tax Cuts and Jobs Act." The speakers are Michael Gray, CPA, Thi Nguyen, CPA of Koehler & Associates, CPAs, Inc. and Yaron Katz, partner from the Washington National Tax Office of KPMG. The presentation will take place from 8 a.m. to noon on Friday, January 19 at Los Gatos Lodge. Breakfast is included. Space is limited to 50 participants. The investment is $45 for members and $85 for nonmembers. Here is a link for registration information http://www.calcpa.org/events-and-programs or call Susie Riffel at 650-436-7169.

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Tax preparation materials will soon be on the way.

For clients who have given their consent, Koehler & Associates is in the process of mailing instructions for sending their 2017 tax return preparation instructions. If you haven't received instructions by January 20 or you would otherwise like to receive instructions, call Thi Nguyen at 408-286-7400, extension 206.

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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 Thi Nguyen at 408-286-7400, extension 206.

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

The final 2017 estimated tax payment for individuals and calendar-year estates and trusts is due January 16, 2018. (Thank Martin Luther King's birthday!) Remember California taxpayers with taxable income of $1 million or more must pay their estimated taxes using the current year's facts.

If you miss the January 16 deadline, making a late estimated tax payment can stop penalties from accruing.

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W-2s, 1099s and DE 542 reminder.

Remember that most 2017 annual information returns, such as W-2s and 1099s, should be issued to payees and sent to the tax authorities by January 31, including electronically filed forms. (The new filing date applies to Form 1099-MISC for services.) Congress moved up the filing date to fight identity theft.

Amounts paid using a credit card should not be included on Form 1099. Those amounts are being reported by the merchant companies.

Also remember that Form 542, Report of Independent Contractors, should also be submitted for ongoing independent contractor arrangements by January 20. The due date is the earlier of 20 days after the date $600 or more of payments have been made to the independent contractor or the date a contract has been entered for $600 or more of services during a calendar year.

Although requirements for real estate operators to issue Forms 1099 were repealed, real estate operators that are real estate professionals should prepare them anyway. See your tax advisor for details.

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Watch FUTA adjustment on year-end report.

California, among other states, has a cutback in its state credit for federal unemployment taxes. That means additional payments of up to $147 per employee will be due with Form 940. Be sure this adjustment is done with your year-end report for 2017 using Form 940, Schedule A.

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Remember to "reset" payroll on January 1.

Software providers will issue updates including the new payroll tax tables as of January 1, 2018. Be sure you have installed those updates before processing your first payroll for 2018. Also, watch for updated tables to be released soon for the new rates under the tax legislation just passed.

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Standard mileage rate for 2018.

The standard business mileage rate for 2018 is 54.5¢ per mile, up from 53.5¢ for 2017. The medical mileage rate is 18¢ per mile for 2018, up from 17¢ for 2017. The mileage rate for moving. Which is also 18¢ per mile for 2018, up from 17¢ for 2017, now only applies for military personnel, because the deduction has been repealed for everyone else starting 2018. The charitable mileage rate is 14¢ per mile, unchanged.

(IR 2017-204, December 14, 2017.)

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Holding period requirements for sale of a principal residence WERE NOT CHANGED.

One of the proposals for the Tax Cuts and Jobs Act was to change the minimum holding period to qualify for the $500,000 for married filing joint returns, $250,000 for other individuals, exclusion from sale of a principal residence from more than two of the last five years to more than five of the last eight years. That provision was NOT passed, so the holding period requirements are unchanged.

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Home mortgage limitation reduced.

Effective for tax years beginning after December 31, 2017, the individual itemized deduction for residential acquisition mortgage interest for a principal residence and a second residence has been reduced from $1,000,000 for married, filing joint returns and $500,000 for other individuals of mortgaged debt to $750,000 for married, filing joint returns and $375,000 for other individuals.

Mortgages incurred on or before December 15, 2017 are grandfathered. Mortgages up to $1 million will continue to qualify for them. If those mortgages are refinanced, the refinanced mortgage will continue to qualify for the residential mortgage interest deduction, PROVIDED THE NEW MORTGAGE DOESN'T EXCEED THE AMOUNT OF THE REFINANCED INDEBTEDNESS.

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Like-kind exchanges for real estate preserved.

Section 1031 like-kind exchanges for real estate not held primarily for sale (personal-use property also generally doesn't qualify) were preserved under the Tax Cuts and Jobs Act, but other like-kind exchanges were repealed, effective for transfers after December 31, 2017. Remember that cost-segregation studies identify property not considered to be "real estate" for faster depreciation, so that part of an exchange may not qualify for deferral. The replacement property may qualify for 100% bonus depreciation or for the Section 179 expense election, so that part may wash, anyway.

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Bonus depreciation increased.

Effective for qualifying property placed in service after September 27, 2017 and before January 1, 2023, the bonus depreciation percentage is increased from 50% to 100%. The 100% allowance is decreased by 20% per calendar year for property placed in service in taxable years after 2022. For the first tax year ending after September 27, 2017, a taxpayer can elect to claim 50% bonus depreciation instead of the 100% allowance.

Used property, other than inherited property or property received as a gift, will now qualify for bonus depreciation. Property received in a reorganization or purchased from a related person also won't qualify.

For trade-ins, like-kind exchanges, or involuntary conversions, bonus depreciation will only apply for any money paid in addition to the traded-in property or in excess of the adjusted basis of the replaced property.

The election to accelerate AMT credits instead of claiming bonus depreciation is repealed.

(Most real estate doesn't qualify for bonus depreciation, but some commercial real estate might qualify. See your tax advisor.)

The maximum bonus depreciation increase for luxury passenger automobiles placed in service after December 31, 2017 is $8,000.

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Section 179 expense election enhanced.

Effective for property placed in service in taxable years beginning after December 31, 2017, the maximum amount a taxpayer may expense for a taxable year under Internal Revenue Code Section 179 is increased to $1,000,000. The $1,000,000 limitation is phased out for the amount of qualifying property acquired over $2,500,000. These amounts and the $25,000 sport utility vehicle limitation will be indexed for inflation for taxable years beginning after 2018.

THE DEFINITION OF SECTION 179 PROPERTY IS EXPANDED TO INCLUDE CERTAIN DEPRECIABLE TANGIBLE PERSONAL PROPERTY USED PREDOMINANTLY TO FURNISH LODGING OR IN CONNECTION WITH FURNISHING LODGING.

The definition of Section 179 property is also expanded to include the following improvements to nonresidential real property placed in service after the date such property was placed in service: roofs; heating, ventilation and air conditioning property; fire protection and alarm systems; and security systems.

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Regular corporation tax rate reduced for tax years beginning after December 31, 2017.

The federal tax rate for regular "C" corporations has been reduced to 21% for tax years beginning after December 31, 2017. The tax rate applies to all corporations, including personal service corporations. Since the old tax rate schedule included a 15% rate for the first $50,000 of taxable income and that rate has been repealed and replaced with a flat tax, some corporations will have a tax increase.

Some taxpayers will consider changing to a "C" corporation structure. In most cases, I would say to consult with a good tax consultant before going ahead. C corporations still have a double tax, once at the corporate level and again from dividends or gain or loss at liquidation. These corporations can also be subject to special taxes, such as the personal holding company tax and the tax on excess accumulated earnings. It's harder to get cash or assets out of a corporation. A corporation's "inside" tax basis (cost for computing gain or loss) of its assets isn't eligible for an adjustment to fair market value at the death of an owner like those of a sole proprietor, partner, or owner of an LLC taxed as a partnership or sole proprietorship.

Generally, we recommend that real estate should NOT be held in a regular C corporation.

The tax rates of corporations will likely be the first target of change should the Democrats gain control of Congress and the Presidency at a later date.

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Tax deduction for non-corporate businesses.

The Tax Cuts and Jobs Act includes a 20% tax deduction for businesses other than C corporations. This deduction is limited and very complex. I've included an explanation in the January edition of Michael Gray, CPA's Tax and Business Insight at www.taxtrimmers.com/bottomline/2018-01.shtml.

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Loss deductions are now limited for ALL non-corporate businesses.

Effective for tax years beginning after December 31, 2017, business losses of non-C corporation taxpayers will be limited to business income plus $500,000 for married persons filing joint returns and $250,000 for other taxpayers. Any disallowed losses will be added to the net operating loss carryforward of the taxpayer. This limitation will apply after applying the passive activity loss rules. The loss limitation for pass-through entities applies at the owner level.

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Net operating losses.

Effective for tax years beginning after December 31, 2017, net operating loss carrybacks have generally been repealed.

A one-year carryback will be allowed for certain disaster losses for farming businesses and certain small businesses. A small business for this purpose means a corporation, partnership, or sole proprietorship whose average gross receipts for the three-taxable-year period ending with the taxable year of the loss does not exceed $5,000,000. Aggregation rules apply to determine gross receipts.

Deductions for net operating loss carryovers are limited to 80% of taxable income before the net operating loss deduction. Unused net operating losses may be carried forward indefinitely. Net operating loss carryovers for tax years beginning after December 31, 2017 will be adjusted annually for cost of living adjustments.

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

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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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