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Michael Gray, CPA's Real Estate Tax Letter

July 12, 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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The year is half over!

Time is sneaking by us again! How is 2017 going for you? Is there any way we can help you reach your goals? How is your tax picture shaping up this year? Call Dawn Siemer at 408-918-3162 or Michael Gray at 408-918-3161 to make a planning appointment now.

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'Tis the season for extensions.

If you need help preparing your income tax returns for which you have filed an extension, call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays to make an appointment.

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Tax Court accepts depreciable basis allocation based on property tax assessment.

Sharon and Steve Nielson purchased rental real estate during 2003 and 2011. They computed depreciation deductions for the properties based on the total purchase prices, with no allocation for (nondepreciable) land and (depreciable) building.

The IRS recomputed the depreciable basis using an allocation based on the local property assessment bills for the properties.

The taxpayer claimed the county assessor's allocation was in error and tried to challenge the IRS's allocation, based on a land sales method and an insurance method.

The Tax Court ruled in favor of the IRS. The Court accepted the County Assessor's allocations as "reliable and persuasive." It said it didn't give much weight to the taxpayers' "after-the-fact allocations."

The taxpayers might have been more successful if they had formal appraisals prepared for the properties. The fact they didn't initially make an allocation probably made the Court unsympathetic to them.

(Nielsen v. Commissioner, T.C. Summary Opinion 2017-31, May 8, 2017.)

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IRS says rental income won't disqualify S corporation status.

A regular "C" corporation is active in the business of acquiring, developing, leasing and managing commercial real estate. It wants to elect to be an S corporation.

S corporations that have C corporation earnings and profits and have "investment income" exceeding 25% of their gross receipts for three consecutive years will have their S elections revoked.

Under Treasury Regulations, "rents" considered to be "investment income" don't include rents derived in the active trade or business of renting property. Rents received by a corporation are derived in the active trade or business of renting property if, based on all of the facts and circumstances, the corporation provides significant services or incurs significant costs in the rental business.

Based on facts provided by the taxpayer about its responsibilities for maintaining and repairing the leased buildings, the IRS ruled the rental income in this case wasn't "investment income" that would disqualify the S election.

The IRS also noted the rules are different for the passive activity loss rules, and that the income or loss relating to the rental activities would be passive activity income or loss, not active trade or business income.

(LTR 201725022, March 23, 2017.)

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IRS allows late election to aggregate rental properties.

An election is available under Internal Revenue Code Section 469(c)(7)(B) to treat all interests in rental real estate as a single rental real estate activity. The election is important under the passive activity loss rules to qualify as a real estate professional by meeting tests to work at least 750 hours on the activity and more than half of total work hours. The tests would apply to each property without the making the election.

A married couple would have qualified to make the election, but inadvertently failed to include the required statement with their income tax return. They filed for permission to make a late election.

The IRS granted the request, provided the taxpayers file an amended income tax return with the required statement within 120 days after issuance of the IRS's letter.

The ruling is a good reminder that this omission is curable, provided the taxpayer apply for relief before a tax examination.

(LTR 2301725003, March 23, 2017.)

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Taxpayer wasn't a real estate professional.

Jamie Ostram claimed she was a real estate professional on her 2011 federal income tax return, and used her $40,968 real estate losses as tax deductions against her other taxable income.

The Tax Court agreed with the IRS that she didn't meet the requirements to be a real estate professional. She had a full time job at One Nevada Credit Union as an information technology specialist at which she worked about 40 hours per week. She was involved in gambling on at least 152 days.

The Court didn't believe she worked at least 750 hours on real estate activities and that more than one-half of her working hours were devoted to them.

(Ostram v. Commissioner, T.C. Memo. 2017-118, June 19, 2017.)

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Donation deduction lost because of a reporting detail and value was overstated.

The Tax Court denied a charitable contribution deduction for a donation of real estate to an LLC because the taxpayer filed to report the cost or adjusted basis of the donated property on Form 8283, Noncash Charitable Contributions appraisal summary. The disclosure is required to claim the deduction under the adequate substantiation requirements.

The taxpayer claimed a $33,019,000 tax deduction.

The Court refused to allow the deduction under a substantial compliance argument. The Court said the disclosure of the cost or other basis would have alerted the IRS of a potential overvaluation of the property.

The Court also found that the remainder interest in real estate for which the taxpayer claimed a tax deduction had a fair market value of $3,462,886, and assessed a 40% penalty for a gross valuation overstatement.

Ouch!

(RERI Holdings I, LLC, 149 T.C. No 1, July 3, 2017.)

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IRS reminds certain taxpayers to renew their identification numbers.

Certain taxpayers who aren't U.S. citizens or permanent residents use an individual tax identification number, or ITIN, to file their income tax returns. (This requirement doesn't apply to taxpayers who have social security numbers.) These identification numbers generally have to be renewed when they aren't used for three consecutive years. ITINs issued before 2013 will expire according to a certain schedule, even when the taxpayer has filed tax returns using the number during the last three years.

The IRS is allowing renewals for filing 2018 income tax returns now. ITINs with the middle digits 70, 71, 72 or 80 currently need to be renewed using Form W-7. Most of these taxpayers should receive a notification from the IRS that they must renew their ITIN with instructions. ITINs with the middle digits 78 and 79 expired last year and should also be renewed, if it has not already been done.

Families have also been given the option to renew ITINs for the entire family at the same time. The family includes the tax return filer, spouse and dependents claimed on the income tax return.

(IR-2017-109.)

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IRS can't charge for registering tax return preparers.

A federal district court ruled that, although the IRS can require tax return preparers to use preparer tax identification numbers (PTIN), it can't charge them for issuing or renewing the numbers.

The IRS temporarily closed its PTIN site, and has reopened it. It has stopped charging a fee to issue PTINs.

(Steele v. United States, 2017-1 U.S.T.C. 50,238, June 5, 2017.)

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Live presentation by Michael Gray for tax professionals, lawyers and financial advisors.

Michael Gray, CPA will give a lunchtime presentation, "Estate Planning without an estate tax", on July 20, 2017 for the Estate & Trusts discussion group, Silicon Valley San Jose Chapter, California Society of Certified Public Accountants (CalCPA.) Locatioin is Abbott, Stringham & Lynch, 1530 Meridian Ave., San Jose. This is an introductory-level presentation focusing on providing for the support of the family and key planning issues. The investment, including lunch, is $20 for CalCPA members and $30 for nonmembers. You can register here www.calcpa.org/events-and-programs/event-details?id=a795efd2-3325-43c6-8f6e-42e0137cf1db or call Susie Riffel at 650-522-3168.

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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 July and August.

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 July and August:

July 7 and 14, Scott Haislet, CPA and attorney at law, "Section 1031 exchanges"
July 21, Scott Haislet, CPA and attorney at law, "Real estate reassessment change of ownership"
July 28, Scott Haislet, CPA and attorney at law, "Sale of a principal residence"
August 4, Greg Carpenter, BTI Mergers & Acquisitions, "Buying a business"
August 11, Greg Carpenter, BTI Mergers & Acquisitions, "Selling a business"

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