Michael Gray, CPA's Real Estate Tax Letter

March 6, 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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Due date for partnership and S corporation tax returns will soon be here.

The due date for calendar year 2017 partnership and S corporation income tax returns is March 15, 2018. If the information for preparing them isn't complete, extension forms should be submitted with the estimated balance of tax by March 15.

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Cutoff for preparing tax returns will soon be here!

If you provide complete information for preparing your 2017 income tax returns by March 15, your tax returns should be finished in time to file them by April 17. Otherwise, an extension form should be submitted with a payment of any estimated balance of tax by April 17.

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Make your tax return preparation interview appointment now.

There is still time for a few personal interview appointments for preparing 2017 individual income tax returns. Many clients send their information without having an interview, but if you need that personal attention, you should schedule your interview appointment now. Call Ms. Thi Nguyen, CPA at 408-286-7400, extension 206.

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IRS issues new Form W-4.

The IRS has released a revised 2018 Form W-4, Employee's Withholding Allowance Certificate. The new form reflects changes for 2108 in the Tax Cuts and Jobs Act of 2017, including the increase in the standard deduction, the elimination or reductions of itemized deductions, and dependent tax credits. You can get the form at https://www.irs.gov/pub/irs-pdf/fw4.pdf.

California has its own withholding form, Form DE-4. Your California withholding allowances might be quite different for the federal allowances. You can get the form at http://www.edd.ca.gov/pdf_pub_ctr/de4.pdf.

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Bipartisan Budget Act includes tax extenders.

The Bipartisan Budget Act of 2018 includes a number of tax provisions that weren't previously included in the Tax Cuts and Jobs Act of 2017.

There are more than 30 provisions that had previously expired, mostly for one year through 2017. Three key provisions are (1) the exclusion for up to $2 million ($4 million for married, filing separate returns) discharged home mortgage debt; (2) the "above the line" deduction for up to $4,000 of qualified tuition and related expenses. (The deduction is phased out for taxpayers whose AGI exceeded $65,000, or $130,000 on a joint return. No deduction is allowed when the taxpayer files a married, filing separate tax return.); (3) the deduction of mortgage insurance premiums for acquisition of a qualified residence. The deduction is phased out for AGI exceeding $100,000, or $50,000 for married persons filing a separate tax return.

The Act also includes a liberalization for hardship distributions from 401(k) plans, eliminating the 6-month prohibition of contributions to the plan when a hardship distribution is received.

Victims of California wildfires who don't itemize deductions can deduct personal casualty losses in excess of a $500 threshold. The 10% penalty on up to $100,000 of pre-age 59 1/2 payouts from retirement plans is waived for these taxpayers. The payment of tax for these withdrawals can be spread over three years.

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IRS announces 2018 estate and gift tax exemption.

The method of computing inflation adjustments was changed by the Tax Cuts and Jobs Act of 2017. The IRS has announced that the 2018 lifetime exemption equivalent for estate and gift tax reporting is $11,180,000.

(Revenue Procedure 2018-18, March 2, 2018.)

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Congressional cleanup needed for qualified improvement property.

As a simplification measure, Congress combined certain real estate improvements as one category in the Tax Cuts and Jobs Act of 2017, called qualified improvement property, effective for property placed in service after December 31, 2017. The intention of Congress was for qualified improvement property to be assigned a 15-year MACRS life, using straight-line depreciation. The 15-year life would qualify the property for bonus depreciation and Section 179 expensing. Unfortunately, Congress made a drafting error that would subject this property to a 39-year life as nonresidential real estate. Congress will have to enact a technical correction to fix this error, and it's uncertain whether they will be able to do that.

If Congress doesn't take prompt action, a 39 year life might have to initially be used for qualified improvement property and an amended return might have to be filed later. If this is the case, taxpayers might consider including protective elections on their income tax returns for 2018 and later years. Bonus depreciation is automatic but a taxpayer can elect out for an asset class. Section 179 expensing is elective.

Qualified improvement property is any improvement to an interior portion of a building which is nonresidential real property if the improvement is placed in service after the date the building was first placed in service by a taxpayer. Qualified improvement does not include expenditures for (1) the enlargement of a building; (2) an elevator or escalator; or (3) the internal structural framework of a building.

This definition is similar to a previous one under Internal Revenue Code Section 168(k)(3) for bonus depreciation, which has been repealed.

The eligibility of external improvements to a restaurant for bonus depreciation that applied before 2018 has been repealed. When these improvements are made after 2017, they will be depreciated as 39-year nonresidential real property.

The property classifications and 15-year recovery periods for qualified leasehold, retail and restaurant improvements were repealed, effective for improvements placed in service after December 31, 2017.

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Forfeited deposit was ordinary income.

The Eleventh Circuit Court of Appeals upheld the Tax Court in ruling that a deposit received for the sale of a hotel and the sale was cancelled was ordinary income. Such payments can be capital gains when the deposit is received for the sale of a capital asset. Business assets, such as land or buildings, aren't capital assets.

(CRI-Leslie v. Commissioner, 121 AFTR 2d 2018-794, February 15, 2018.)

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Arizona LLP was required to file a California income tax return.

Zepha Group LLP, an Arizona LLP, owned a "profits and loss" interest in Mission Park, an Arizona limited partnership. The sole asset of Mission Park was an apartment building located in Tuscon, Arizona. The managing partner of Mission Park was a California resident. Zepha Group didn't file California income tax returns for 2008 and 2011. (2009 and 2010 weren't discussed in this case.)

The California State Board of Equalization ruled that Mission Park was doing business in California because the managing partner was a resident of California. Therefore, it should have filed California income tax returns for 2008 and 2011 and paid the $800 per year annual LLC tax. The SBE also assessed filing fees and demanded penalties and cost recovery fees.

(Appeal of Zepha Group LLP, California State Board of Equalization Case Numbers 791796 and 848510, November 29, 2016, released October 18, 2017.)

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Time extended for claiming casualty loss for pyrrhotite in foundations.

Homeowners who are mostly located in Connecticut and experienced repair costs for defective concrete foundations containing pyrrhotite have received an extension of time for paying repair expenses and claiming a deduction on the taxpayers' 2017 income tax return. The expenses may be paid up to the time they file their 2017 federal income tax return, including extensions. If the expenses are paid after the original Form 1040 is filed for 2017, they may still be deducted on Form 1040X provided the expenses are paid by the due date for Form 1040X for 2017.

(Revenue Procedure 2018-14.)

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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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Michael Gray, CPA
2482 Wooding Ct.
San Jose, CA 95128
(408) 918-3162
FAX: (408) 938-0610
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