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Michael Gray, CPA's Real Estate Tax Letter

September 19, 2016

© 2016 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 due date for individual income tax returns will soon be here.

We are in the midst of a second tax season. The extended due date for 2015 individual income tax returns is Monday, October 17. If you haven't given the information to finish your income tax returns to your tax return preparer yet, do it now! To make your appointment, call Dawn Siemer Mondays, Wednesdays or Fridays at 408-918-3162.

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Watch September 30 deadline for inherited IRAs.

For an IRA inherited when the owner was deceased during 2015, the designated beneficiaries must be established by September 30, 2016. In order to qualify for an extended payout over the life expectancy of one or more beneficiaries, all of the beneficiaries must be individuals or certain trusts. Otherwise, the account must be distributed within five years after death. A non-individual beneficiary, such as a charity, can be eliminated from consideration by distributing its share by September 30, 2016. See your tax advisor for details.

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Governor Brown again vetoes extension of debt cancellation exclusion.

California hasn't conformed to federal legislation extending the exclusion of cancellation of debt of qualified mortgage indebtedness for a principal residence. Governor Brown vetoed SB 907, which would have retroactively reinstated California's exclusion. Taxpayers who have cancellation of indebtedness income can still claim an insolvency exclusion, if they qualify for it.

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IRS issues proposed regulations that make estate planning for family businesses urgent.

The IRS has issued proposed regulations attacking family businesses, including popular family limited partnerships and LLCs. These entities are widely used for succession planning and to secure favorable valuation benefits for lack of marketability and lack of control.

The proposed regulations do not apply to fractional ownership of real estate outside of a family corporation or family limited partnership.

The IRS is using a "lapsing rights" argument under Internal Revenue Code Section 2704 to create a deemed right of liquidation based on family control of the business and claim a minimum value of an interest based on the net value of the underlying assets, instead of a going concern value. Going concern value has historically been the basis of valuation, and can result in a much lower value of the business interest when the assets have been underperforming.

In addition, transfers during the three years before death or a gift would be disregarded. This would eliminate the ability to realize transfer tax savings from "death bed" transfers, even to unrelated persons.

The proposed regulations are extremely complex and hard to understand. If you have a family business and your family could potentially be subject to estate and gift taxes, you should consult with a qualified estate planning attorney now. Consider telling your representatives in Congress that you oppose the proposed regulations under Internal Revenue Code Section 2704.

The proposed regulations generally aren't effective until they are finalized, but the three-year rule could apply to certain transfers that are made before that date. A public hearing is scheduled for December 1, 2016, so the regulations won't be finalized until after that date.

(NPRM REG-163113-02, August 3, 2016.)

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Watch deadlines for California property tax assessment appeals.

The value for computing California property taxes is limited to fair market value on January 1. Occasionally, the county assessor will value a property higher than the fair market value. The property owner must appeal the assessed value by certain dates for the appeal to be valid.

The filing period for appeals in Alameda, Inyo, Kings, Placer, San Francisco, San Luis Obispo, Santa Clara, Sierra and Ventura Counties ends September 15, 2016.

For all other counties, the appeals period ends November 30, 2016.

For general information on filing and presenting an appeal, see BOE Publication 30, Residential Property Assessment Appeals.

Here is a web site with links to county assessor's offices: www.boe.ca.gov/proptaxes/assessors.htm.

(Spidell's California Taxletter, September 1, 2016, p.5. "Filing property tax assessment appeals."

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Watch big penalties for failure to file S corporation and partnership income tax returns.

American Orthodontics Corp., a Wisconsin S corporation, didn't file a California income tax return for 2010. The corporation wasn't subject to corporate income tax in California under federal Public Law 86-272, but had six salespeople working in California during 2010.

The S corporation was found to be "doing business" in California and subject to the $800 minimum franchise tax.

The corporation later realized it was subject to the California minimum franchise tax and filed the tax return on June 15, 2012. At that time, they weren't yet contacted by the Franchise Tax Board that a tax return was required.

The corporation had 75 shareholders. The penalty for late filing is $18 per shareholder per month, for a maximum of twelve months. The Franchise Tax Board charged a $16,200 penalty.

The State Board of Equalization upheld the Franchise Tax Board and said the reasonable cause exception didn't apply. The company failed to demonstrate reliance on its tax advisors in failing to file the tax return. The penalty was charged in accordance with California's tax laws.

(Appeal of American Orthodontics Corp., California State Board of Equalization Case No. 711153, August 5, 2014.)

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Fortified deposits were ordinary income.

The Tax Court upheld the IRS in holding that forfeited deposits received for a failed sale of depreciable real estate were ordinary income. The taxpayer claimed the deposits should be treated as long-term capital gain for the sale of a capital asset under Internal Revenue Code Section 1234A, but the Tax Court said the gain was for business property under Internal Revenue Code Section 1231 and not capital gain property.

(CRI-Leslie, LLC, 147 TC No. 8, September 8, 2016.)

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Completed contract method allowed for a housing development.

The Ninth Circuit Court of Appeals upheld the Tax Court in ruling against the IRS that a home builder properly elected and accounted for its income using the completed contract method. Under the contracts of sale for the homes in a development, the builder was obligated to build common improvements of the planned community development where the homes were located. The income for the homes sold before those common improvements were completed weren't taxable income until they were completed. Further, because of the nature of the planned community, each resident had an interest in the use of property of all residents, so the cost of all of the homes and the common improvements had to be included for determining when 95% of the budgeted costs were incurred for the contract to be considered complete.

Developers of residential neighborhoods will want to study this case with their tax advisors carefully.

(Shea Homes, Inc. and Subsidiaries, 2016-2 U.S.T.C. ¶ 50,391.)

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IRS grants automatic relief for some late IRS rollovers.

Generally a rollover from an IRA to another IRA or qualified plan must be completed within 60 days, or it's taxable. (Also, only one rollover is allowed during a twelve-month period.)

The IRS has the authority to extend the 60-day period. Now it has issued a procedure for taxpayers to certify in a letter to a plan administrator that the taxpayer meets the requirements for an automatic IRS approval for a late rollover.

The Revenue Procedure includes a list of acceptable reasons. Here are a few of them.

See your tax advisor or read the Revenue Procedure for a complete list.

The taxpayer must resolve the issue within 30 days after discovering the problem.

(Revenue Procedure 2016-47)

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Governor Brown approves California due date conformity.

Governor Brown has signed AB 1775, which will make the initial filing dates the same for California income tax reporting as for federal tax reporting, effective for the 2017 filing season. Calendar-year partnership income tax returns (including most LLCs) will be due March 15. Calendar year C corporation income tax returns will be due on April 15. The filing date for other taxpayers, including S corporations (still due March 15 for calendar year S corps), are unchanged.

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Does your group need a speaker?

We are seeking opportunities to speak before groups. Topics include recent tax developments, tax issues relating to real estate, how estate planning has changed recently, tax issues relating to alternative investments using retirement accounts, and marketing topics such as "How I created a public access television show broadcast on eleven Bay Area stations." To make arrangements, call Michael Gray at 408-918-3161.

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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 and siliconvalley.citysearch.com.

We use Angie's List to assess whether we're doing a good job keeping valued customers like you happy. Please visitAngiesList.com/Review/4258970 in order to grade our quality of work and customer service.

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Financial Insider Weekly broadcast schedule for September and October.

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 September and October:

September 16 and 23, Michael Desmarais, attorney at law, "But my spouse agreed!"
September 30, Craig Martin, CFP®, The Family Wealth Consulting Group, "The role of emotions in investing"
October 7, Bill Neville, Certified IRA Services Professional, The Entrust Group, "Making real estate investments in your IRA or Roth account"
October 14, Bill Neville, Certified IRA Services Professional, The Entrust Group, "Making alternative investments in your IRA or Roth account"
October 21 and 28, Nancy Ross, Bauer Shepherd & Ross and Associates, "How a collaborative approach can make a divorce a less painful process"

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