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Michael Gray, CPA's Real Estate Tax Letter

August 19, 2016

© 2016 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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Estimated tax payments are due September 15.

The next due date for quarterly estimated tax payments is September 15. For most taxpayers, there is no California payment due because the first and second payments were "front loaded."

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Extended due date for most calendar year taxpayers except individuals is September 15.

The extended due date for filing income tax returns of calendar year corporations, partnerships (including LLCs), estates and trusts is September 15. Be sure your tax return preparer has the information to complete your income tax returns.

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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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'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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Taxpayer wins! 1031 exchange upheld.

BD, a drugstore chain, set up a "reverse exchange." It arranged for an intermediary to acquire a property, demolish the existing improvements and build a building which it temporarily leased from the intermediary and used as a drugstore location. The building was financed by a loan to the intermediary which was guaranteed by BD. Then BD sold another property via the intermediary and used the proceeds to acquire the property on which the new store was built.

The IRS claimed that BD should be treated as the owner of the replacement property because it had the benefits and burdens of ownership from the time the property was acquired.

The Tax Court ruled that this type of structure was intended to qualify for an exchange in the Section 1031 exchange rules adopting a qualified intermediary approach.

Taxpayers and their advisors who are planning a "reverse exchange" arrangement, particularly when they are planning to improve the replacement property before completing the exchange, will find it worthwhile to study this case.

(Estate of George Bartell, 147 T.C. No. 5, August 10, 2016.)

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Real estate professionals don't automatically get non-passive status.

Delores Gragg claimed that losses from her rental real estate activities shouldn't be subject to the passive activity loss limitations because she was a real estate professional. Delores was able to show that she qualified because she worked more than 750 hours in a real estate occupation, and more than half of her working hours were in that occupation.

The Ninth Circuit Court of Appeals upheld a U.S. District Court decision against Delores. Qualifying as a real estate professional is one leg of the test to avoid the passive activity loss rules. In addition, the taxpayer must prove material participation in the rental real estate activity. That generally means the taxpayer must work at least 500 hours on the rental real estate activity.

Delores didn't prove material participation, so her losses were disallowed as a current deduction under the passive activity loss rules.

(Gragg, 2016-2 U.S.T.C. 50,370, August 4, 2016.)

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"Flippers" base LLC fee on total sale proceeds.

The Franchise Tax Board has issued guidance for how real estate investors compute the California LLC fee. If the property is held for sale to customers in the ordinary course of business (what is sometimes called "flipping"), the gross sale proceeds are the base for the LLC fee. If property is held for investment purposes and sold (such as most long-term rental properties), only the net gain is included in the LLC fee base (sale price minus selling expenses minus the adjusted basis of the property).

(FTB Legal Ruling 2016-01, July 14, 2016.)

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IRS issues information reporting guidance for medical insurance.

The IRS has issued guidelines on issuing information reports for medical insurance and other health plans for 2016. Some of these reports are still drifting out to taxpayers for 2015. Statements to individuals are required to be issued to individuals by January 31, 2017, like most other information returns. The IRS copy is required to by filed by February 28, 2017, if on paper, and March 31, 2017, if eflied.

(NPRM REG-103058-16.)

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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 August and September.

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 August and September:

August 19 and 26, Charles H. Packer, attorney at law, Hopkins & Carley, "Succession planning issues of family businesses"
September 2 and 9, Michael Desmarais, attorney at law, "But my spouse agreed!"
September 16 and 23, Michael Desmarais, attorney at law, "Why don't we just live together?"
September 30, Craig Martin, CFP®, The Family Wealth Consulting Group, "The role of emotions in investing"

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