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Michael Gray, CPA's Real Estate Tax Letter

May 1, 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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Hello! It's time for cleanup and extensions.

It's been a while since we've issued a newsletter. We are coming out of the fog of tax season. 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 Dawn Siemer on Mondays, Wednesdays or Fridays from 9 a.m. to 5 p.m. at 408-918-3162.

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Personal property tax statements are due.

The Assessor for Santa Clara County has issued a reminder that May 7, 2017 is the last day that the annual personal property tax statement can be filed online without incurring a late filing penalty.

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Master writer offers training.

John Carlton, who is one of my copywriting mentors, is offering coaching and training materials for learning to write "killer" advertising and sales letters. If you want to learn how to attract a hoard of customers to your business, use this link: https://m190.isrefer.com/go/sws/dgsiemer/.

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President Trump reveals tax proposals.

On April 26, the Trump administration released an outline of its tax proposals for Congress. The proposal includes a steep tax cut for corporations and businesses from 35% (39.6% for individual owners) to 15%. The maximum rate for individuals (other than for business income) would be reduced from 39.6% to 35%, and the 3.8% net investment income tax and the alternative minimum tax would be repealed. The thresholds for the tax rates haven't been specified.

No "border tax" for imports is proposed at this time. Corporations would move from a tax on worldwide taxable income to a "territorial" tax system, which would subject them to U.S. tax only for U.S. income.

On the deductions side, the standard deduction would be doubled to $24,000 for a married couple, and all itemized deductions would be repealed except the deduction for home mortgage interest and charitable contributions. (So with almost all deductions repealed, who needs an alternative minimum tax?)

A side effect of the increased standard deductions and repealing the deduction for real estate taxes is to eliminate the tax benefits of home ownership for almost all Americans except for those in very high cost areas like the San Francisco Bay Area.

With the high standard deduction, most taxpayers won't receive a tax benefit for making charitable contributions.

For many taxpayers who live in states like California, the state income tax deduction is their biggest tax deduction. It would be eliminated under this plan, and they might discover they will pay higher income taxes under these proposed changes.

Although the Trump administration proposes to provide more tax benefits for child care, single parents will probably find that is more than offset by a tax increase from the elimination of head of household status.

Another feature of the proposal is to repeal the federal estate tax, which currently only applies to the very wealthy, since a married couple already has almost an $11 million exclusion. The proposal didn't specify whether the federal gift tax would be repealed or not.

Many details still need to be provided, and the devil is in the details. The bare bones of this proposal would result in a huge tax windfall for the wealthy and tax deficits for the nation.

These proposals are only the beginning of a huge negotiation battle in Congress. Let your representatives in Congress know the changes that you favor and the changes you oppose. Here is a web site with contact information. https://www.usa.gov/elected-officials

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Trump calls tax regulations into question.

President Trump has signed an Executive Order, "Identifying and Reducing Tax Regulator Burdens." The Treasury Department (IRS) has been told to reevaluate all significant tax regulations issued on or after January 1, 2016. Any regulation that doesn't comply with specified policy standards regarding "undue compliance costs, complexity or overreaching of the IRS's authority" should be "revised or eliminated."

President Trump seems to be determined to reverse almost everything that was done during the last year of President Obama's term of office.

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For our readers who are CPAs.

I'm developing an initiative just for CPAs in public practice and need your contact information. Please send an email to mgray@taxtrimmers.com or call Dawn Siemer on Mondays, Wednesdays or Fridays at 408-918-3162. Just say "I'm a CPA in public accounting who reads your newsletter" and give your name, address, telephone number and email address. Thanks!

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Dentist successfully defends status as a real estate professional.

A married couple were both dentists. They owned a dental practice and a real estate brokerage company, and also owned and managed four rental properties. The husband claimed real estate professional status. The IRS said the husband didn't qualify.

The Tax Court held against the IRS. The taxpayers pesuaded the Tax Court the husband spent more than 750 hours for the year and worked most of the time in the real estate business. He worked less than 1,000 hours for each year in the dental practice and more than 1,000 hours for each year in the real estate business.

The taxpayers weren't winners on every issue in this case. They weren't able to substantiate some of their tax deductions. It appears many of their records had deteriorated or were lost. Negligence penalties were assessed for the disallowed deductions.

Note the IRS is targeting real estate professionals. If a taxpayer has a second job or profession, it will challenge that status and wins most of the time. The taxpayers incurred signficant time and expense to defend that position. If you are going to claim real estate professional status, be prepared to defend it.

(Zarrinnegar and Dini v. Commissioner, T.C. Memo. 2017-034, February 13, 2017.)

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Stock broker also defends her real estate professional status.

A stock broker worked in Wells Fargo's brokerage department. She also owned twelve rental properties and some land. She managed those properties from a home office in the morning before going to her job at Wells Fargo.

The IRS claimed she didn't meet the real estate professional requirements and couldn't deduct her real estate losses against her wages as a stock broker and income from IRA withdrawals used to pay real estate expenses.

The Tax Court ruled against the IRS. The taxpayer was able to substantiate working more than 750 hours on her real estate activities and that more than half of her work hours were devoted to her real estate business. Although she failed to make the election to treat all of her real estate as one activity, she was able to meet other tests to prove material participation.

This taxpayer also wasn't a winner in all of the issues for this case. The Tax Court wasn't satisfied with her records for almost $50,000 of business meals, and disallowed those deductions as well as some other business expenses.

(Windham v. Commissioner, T.C. Memo. 2017-068, April 24, 2017.)

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No S corporation basis for loan guarantee.

A taxpayer was a 50% shareholder in an S corporation that was a real estate developer. The taxpayer guaranteed the S corporation's loan with a bank. When the Florida real estate market collapsed, the S corporation defaulted on its loan. The bank received judgements against the guarantors of the loans, but the taxpayer refused to pay the bank.

The taxpayer claimed tax basis (investment supporting a loss deduction) in the S corporation for the bank's judgement and used that basis to justify deducting S corporation losses and a net operating loss carryback.

The Tax Court upheld the IRS in finding the guarantee and judgements weren't enough for the taxpayer to receive additional tax basis. The taxpayer had to honor the guarantee and judgements by paying them.

(If the taxpayer had borrowed the funds directly from the bank and invested them directly in the S corporation, the tax basis would have been allowed.)

(Phillips v. Commissioner, T.C. Memo. 2017-061, April 10, 2017.)

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Trump budget blueprint cuts IRS funding.

President Trump has submitted a budget blueprint to Congress for the fiscal year ending in 2018. The proposal includes cutting the budget for the IRS by $239 million. The IRS's budget has been decreased every year since fiscal year ending 2010.

This is like trying to run a growing company while reducing staffing for accounts receivable (collections). It makes no sense.

Tax cheats are getting off free because the IRS can't administer the tax laws.

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Fewer agents = fewer prosecutions.

IRS Criminal Investigations reported that between fiscal year 2012 and fiscal year 2016, the number of Criminal Investigations special agents declined by 447 and 485 fewer prosecutions were processed. Criminal Investigations also reported it had a 92% conviction rate in fiscal year 2016. The reduced staffing was a result of reduced funding by Congress.

(Wolters Kluwer Federal Tax Weekly, March 9, 2017, p. 114. "IRS Criminal Investigation links decline in staffing to fewer prosecutions")

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Six month extension for C corporations.

The IRS says on its web site that a six-month extension will be allowable for C corporations, despite changing the due date for calendar year corporations to April 18 for 2016 tax returns. That means extended tax returns for calendar year 2016 income tax returns of C corporations would be due on October 16, 2017.

(Wolters Kluwer Standard Federal Tax Reports, February 16, 2017, p. 2. "IRS confirms six-month extension for C corporations.")

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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 broadcast schedule for May and June.

Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 9:30 p.m., Pacific Time. You can watch it on Comcast channel 15 for San Jose and Campbell. The show is broadcast as streaming video at the same time at www.creatvsj.org.

Here are the scheduled interviews for May and June:

May 5 and 12, Paul Duren, Bridge Bank, "Small business financing"
May 19 and 26, Jeffrey Hare, attorney at law, "Alternative dispute resolution"
June 2 and 9, Michael Jones, CPA, Thompson Jones, LLP, "Beneficiary designations for retirement accounts"
June 16, Peggy Martin, CLU, ChFC, The Family Wealth Consulting Group, "Long-term care insurance"
June 23 and 30, Peggy Martin, CLU, ChFC, The Family Wealth Consulting Group, "Life insurance basics"

Financial Insider Weekly is also broadcast as follows:

Past episodes of Financial Insider Weekly are posted on YouTube. One way to watch them is to go to our web site, www.financialinsiderweekly.com, and click on "Past Episodes."

Let me know any ideas that you have for topics or guests. Guests will usually have to be located in or near the Silicon Valley in California.

Hope you can watch or record the show. Please tell your friends about it!

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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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A monthly newsletter focusing on tax issues for the homeowner and real estate investor, by certified public accountants in California.
Michael Gray, CPA
2190 Stokes St. Ste. 102
San Jose, CA 95128
(408) 918-3162
FAX: (408) 998-2766