Michael Gray, CPA's Real Estate Tax Letter

May 8, 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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It's time for cleanup and extensions.

Maybe you have an issue for which you would like a second look on the income tax returns you just filed. Maybe you have extended income tax returns that you need to have prepared. Or maybe you have some planning issues for which need advice. To make an appointment, call Thi Nguyen, CPA at 408-286-7400, extension 206.

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Have you checked out Jay Abraham's outstanding FREE resources?

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Home remodeling deductions disallowed.

The Tax Court upheld the IRS in disallowing current deductions for remodeling a home. $21,109 of $39,520 of expenses were for vehicle and aircraft transportation. The taxpayers didn't have any other properties that they had remodeled and sold. The level of their activity wasn't sufficient to establish a trade or business. The IRS and the Tax Court said the expenses should be treated as an additional investment in the home at the time it is was sold.

(Havener and Costa v. Commissioner, T.C. Summary 2018-17, April 4, 2018.)

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Aircraft chartering business couldn't be grouped with real estate development business.

The Tax Court upheld the IRS in disallowing losses from an air chartering business, which taxpayers claimed should be grouped with their real estate development business. The Tax Court found that the air chartering business wasn't an "appropriate economic unit" to combine with the real estate development business, and that the taxpayer didn't materially participate in the air chartering business. (The operation of the air chartering business was subcontracted to another company.) The tax deficiency was $152,602 and the accuracy penalty for negligence of $30,520 was also upheld. Ouch!

(Brumbaugh v. Commissioner, TC Memo. 2018-40, April 3, 2018.)

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Title doesn't control determination of community property.

The California State Board of Equalization (BOE) has issued a letter relating to the determination of whether real estate is held as community property. The letter follows a California Supreme Court ruling, In re Marriage of Valli, 58 Cal. 4th 1396. According to Property Tax Rule 63, owners are excluded from reassessment for transfers between spouses and any transfers between spouses of interests in legal entities.

The previous policy of the BOE was that legal title held by just one spouse, even if acquired during marriage, would not be treated as community property owned equally with the other spouse absent contrary "clear and convincing evidence." County assessors relied on the deed to determine ownership by the spouses.

In 2014, the California Supreme Court ruled that life insurance titled to just one spouse as owner was community property because it was acquired during marriage.

Now county assessors will have to make more detailed inquiries about the title for the property. In order to convert property to separate property, both spouses should consent to the conversion in writing. County assessors might also request a certificate of marriage when examining the ownership of property. (Note that property received by an individual as a gift or inheritance is separate property, even when received by a married person.)

(BOE Letter No. 2018/14, Spidell's California Taxletter, May, 2018, p. 6, "Community property and spousal transfers.")

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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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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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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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