Michael Gray, CPA's Real Estate Tax Letter
October 5, 2018
© 2018 by Michael C. Gray
ISSN 1930-0387
A monthly report focusing on tax issues for the homeowner and real estate investor.
Table of Contents
- Extended individual and C corporation income tax returns are due October 15.
- Florence victims might qualify to claim 2018 hurricane losses on their 2017 income tax returns.
- Companies can help employees recover from disaster losses.
- Last chance to "undo" a Roth conversion.
- Business owners can still set up a SEP-IRA for 2017.
- For tax professionals and advisors--Live seminar about 20% Deduction For Business Income with Michael Gray, CPA.
- CPAs! Want help with your promotions, recruiting notices, newsletters, online articles, or books?
- Do you love Disney?
- Jay Abraham offers free business improvement training materials.
- House passes Tax Reform 2.0 legislation.
- Accounting method for vacation rentals should be reviewed.
- IRS loses! Taxpayer was a real estate professional.
- Spousal agreement doesn't save mortgage interest deduction.
- Sometimes 1099s are wrong.
- Families with Dynasty Trusts should review their generation skipping tax planning.
- Payments under a state or local tax credit program by a business may be deductible as a business expense.
- Simplified dissolution for California corporations and LLCs that never did business.
- California adopts federal partnership audit rules.
- Please share your good experiences with Michael Gray, CPA.
- Financial Insider Weekly past episodes
- Follow me on Twitter, Facebook, LinkedIn and Google+!
- Do you know about our other newsletters?
- Check out my blog.
- Subscribe/Remove from Michael Gray, CPA's Real Estate Tax Letter
Extended individual and C corporation income tax returns are due October 15.
Does your tax return preparer have your information to prepare your income tax returns yet? (Congratulations to those who have already filed their income tax returns!) Note that victims of Hurricane Florence have until January 31, 2019 to file their 2017 income tax returns, and make their estimated tax payments that otherwise have been due on September 17, 2018 and to file their payroll and excise tax returns.
(IR-2018-187, IR-2018-189.)
Florence victims might qualify to claim 2018 hurricane losses on their 2017 income tax returns.
There is a special rule allowing a tax deduction for casualty losses attributable to a federally-declared disaster on the previous year's income tax return. For Hurricane Florence, the amended income tax return to claim this loss is due October 15, 2019. I recommend that you consult with a tax professional when claiming this loss.
Companies can help employees recover from disaster losses.
When a company helps employees recover from a federally-declared disaster, the company is allowed to deduct the payments as a business deduction and the payments are tax-free to the employees. Please consult with your tax advisor about whether you qualify for this tax benefit.
Last chance to "undo" a Roth conversion.
You can still change your mind for a 2017 conversion of a regular IRA to a Roth IRA. The correction must be done by October 15, 2018. This procedure is no longer available for tax years after 2017. It was repealed by the Tax Cuts and Jobs Act of 2017.
Business owners can still set up a SEP-IRA for 2017.
Certain businesses that don't have other qualified plans and have extended the filing date for the income tax returns can still set up and fund a SEP-IRA plan and make a retirement plan contribution for 2017 up to October 15, 2018. See your tax advisor.
For tax professionals and advisors -- Live seminar about 20% Deduction For Business Income with Michael Gray, CPA.
The tax deduction of 20% of qualified business income under Internal Revenue Code Section 199A is one of the most complex provisions of the Tax Cuts and Jobs Act enacted on December 22, 2017. The IRS has issued proposed regulations about how to apply the new rules.
At this lunchtime seminar, Michael Gray will explain the highlights of the proposed regulations to help tax professionals and financial planners work with clients to plan for and implement the new rules.
The seminar will be located at Abbott, Stringham & Lynch, 1530 Meridian Ave., San Jose on Tuesday, October 23. Registration will be at 11:45 a.m. and the program will start at noon and conclude at 1:30 p.m. The investment, which includes lunch, is $30 for CalCPA members and $70 for non-members.
Online registration is at www.calcpa.org/svsj. For phone reservations, call Regine Staufenberg at 650-436-7169.
CPAs! Want help with your promotions, recruiting notices, newsletters, online articles, or books?
Michael Gray, CPA is available for promotional and content writing assignments. In addition, some of our publications and articles are available for licensing (use for a fee). Want more information? Call Michael Gray weekdays at 408-918-3161.
Do you love Disney?
I have created a Facebook group, called Disney Magic, for members to share Disney photos, experiences and tips. I am also posting developments for Disney films, television shows, and amusement parks there. If you are on Facebook, you can use this URL to join: https://www.facebook.com/groups/2006739209578437/, or search "Groups" on Facebook. You have to use the "join" button to join the group. This is a closed group, and I will approve your membership.
Jay Abraham offers free business improvement training materials.
Marketing and business improvement guru Jay Abraham has made a wealth of training materials available at his updated website. It could take years to study all of it. The web site address is www.Abraham.com. Click the Knowledge Center button. Check it out!
House passes Tax Reform 2.0 legislation.
Don't hold your breath for the Senate. The House of Representatives has passed tax legislation that would make the individual and noncorporate tax provisions that are currently scheduled to expire after 2025 permanent. At least 60 votes would be required to pass the legislation in the Senate, which now seems highly unlikely. The legislation probably won't pass in Congress this year.
Accounting method for vacation rentals should be reviewed.
There are two methods currently used to allocate real estate taxes and mortgage interest between personal and rental use of a vacation home. The "IRS method" is to make a ratio of rental days to the total number of days the property was used for any purpose during the year. The "court method" or "Bolton Method" (Bolton, 77 T.C. 104 (1981), affirmed 694 F.2d 556 (9th Circuit, 1982) is to allocate real estate taxes and mortgage interest based on the total rental days to the total days in the year.
Under the Trump tax law changes enacted at the end of 2017, the deductions for real estate taxes and mortgage interest are more limited. (Total deduction for state and local taxes limited to $10,000, deductions for most equity line interest repealed, maximum mortgage for which residential acquisition interest is deductible reduced from $1 million to $750,000.)
Considering these changes, taxpayers who have been using the "court method" might want to change to the "IRS method" for 2018. See your tax advisor.
IRS loses! Taxpayer was a real estate professional.
During 2014, Roberta and William Birdsong owned two rental real estate properties, with four and five rental units.
During 2014, Roberta was the only person actively involved in the daily management of the properties. Her management duties included inspecting units, preparing units for rental (hiring and supervising contractors), advertising empty units, screening potential tenants, showing the units and processing rental applications. She didn't have any other employment that generated income.
Roberta produced two spreadsheets detailing her real estate activities. One showed she logged 844 hours for 2014, and the second showed 1,136 hours. The second spreadsheet included items that were omitted from the first one, based on information from her receipts and invoices.
The IRS claimed that Roberta's records didn't substantiate her qualification as a real estate professional because they weren't contemporaneous.
The Tax Court accepted her spreadsheets as sufficient to justify claiming that she was a real estate professional. The Court was persuaded by the records produced, including receipts and invoices, and Roberta's oral testimony.
(Birdsong v. Commissioner, T.C. Memo. 2018-148, September 10, 2018.)
Spousal agreement doesn't save mortgage interest deduction.
Moshe and Chevy Frankel filed separate income tax returns for 2013. A second home located in Sullivan County, New York was purchased in 2005. Under the title of the property and the mortgage agreement, Moshe was sole owner. Moshe and Chevy made a "Spousal Marital Residence Agreement" under which Chevy assumed responsibility for the mortgage and agreed to be responsible for all expenses associated with the mortgage, property and school taxes, escrow, insurance and all maintenance expenses.
Moshe declared bankruptcy during 2009. No payments were made on the mortgage after July, 2011. The house was sold in a short sale for $84,000 and the remaining mortgage balance of over $204,000 was cancelled by the mortgagee in 2013. The mortgagee allocated $37,700 of the proceeds to accrued but unpaid interest.
Chevy deducted the interest on her separate 2013 income tax return.
The Tax Court upheld the IRS in disallowing the deduction on Chevy's 2013 income tax return. The Court said she did not qualify as an equitable owner of the property because the title of the home was in Moshe's name and she didn't make consistent payments for the property. Household expenses were paid from a joint account. The Court also said that, in New York, the mere fact of marriage does not entitle each spouse to a present vested ownership in marital property.
(Note that, since the interest was paid from the sale proceeds from the property, which was owned by Moshe, Chevy didn't in fact pay the interest.)
(Chevy Frankel v. Commissioner, T.C. Summary Opinion 2018-45, September 19, 2018.)
Sometimes 1099s are wrong.
Jin Man Park received a $13,508 payment during 2014 from Bank of America. After investigating the matter, he believed the payment was a reimbursement for overpayments that he made on his home mortgage. Bank of America issued Form 1099-MISC, reporting other income to Jin of $12,789, and Form 1099-INT, reporting interest income of $719. The Tax Court accepted Jin's argument that the Form 1099-MISC was issued in error and held that only the $719 of interest income was taxable for 2014.
(Park v. Commissioner, T.C. Summary Opinion 2018-46, September 24, 2018.)
Families with Dynasty Trusts should review their generation skipping tax planning.
Under the Tax Cuts and Jobs Act of 2017, the generation skipping tax exemption for an individual has increased to $11,180,000 for 2018 from $5,490,000 for 2017. If individuals created a "dynasty trust" (an irrevocable trust designed to last several generations) before 2018, and those individuals are still living, they should consult with their tax advisors about whether they should take any actions now to use their additional generation skipping tax exemption before its scheduled expiration after 2025.
Payments under a state or local tax credit program by a business may be deductible as a business expense.
The IRS has clarified that a business taxpayer that makes a business-related payment to a charity or government entity and receives a state or local tax credit can still generally deduct the payment as an ordinary and necessary business expense as long as the payment was made with a business purpose. This is a different result from the announcement for most individuals discussed in our last newsletter.
Simplified dissolution for California corporations and LLCs that never did business.
Governor Brown has signed AB 2503, which makes a domestic corporation or limited liability company subject to voluntary or involuntary administrative dissolution or administrative cancellation if:
- The entity either never did business or filed returns/paid tax when it was operating and has no remaining business assets; or
- The entity's powers are, and have been, suspended by the FTB for a specified period of time.
This should provide an avenue to clean up inactive corporations and LLCs.
(AB 2503, Spidell's Flash Email, September 24, 2018.)
California adopts federal partnership audit rules.
Governor Brown has signed SB 274, which generally conforms to the new federal centralized partnership audit regime.
(SB 274, Spidell's Flash Email, September 24, 2018.)
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+.
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.
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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