The Minnesota Real Estate Show Blog



Wednesday, October 11, 2017

Mortgage broker not qualified as a real estate professional


Mortgage broker not qualified as a real estate professional

Hickam, TC Summary Opinion 2017-66

Passive Loss Rules

Under IRS code section 469 all real estate activities are considered passive and any losses related to such activities are disallowed or can only be offset by passive income. The passive loss rules/limitations are different if a taxpayer qualifies as a real estate professional. If a taxpayer qualifies as a real estate professional and materially participates, the loss disallowance doesn’t apply and the taxpayer’s rental real estate activity, if conducted as a trade or business, is not treated as a passive activity.

A taxpayer qualifies as a real estate professional if: (1) more than half of the personal services that the taxpayer performs during that year are performed in real property trades or businesses in which he materially participates with 5% ownership; and (2) the taxpayer performs more than 750 hours of services during that tax year in real property trades or businesses in which he or she materially participates.

"Real property trade or business: the term "real property trade or business” means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.”

Taxpayer situation

During 2011 and 2012 the taxpayer brokered real estate mortgages and other loans as an independent contractor for a mortgage brokerage company. During this time, the taxpayer brokered and originated loans for clients to buy real estate, refinanced existing loans, and secured reverse mortgages, commercial loans and sometimes construction loans. Taxpayer did not operate, develop, construct, or rent real estate in brokering mortgages or originating loans.

During this same period, the taxpayer actively managed and maintained three rental real estate properties. The taxpayer claimed he was a real estate professional for tax purposes by brokering and originating mortgages.

Decision

Chief Counsel Advice 201504010 states that a real estate agent who brings together buyers and sellers of real property can be deemed a real estate professional who is engaged in a real property brokerage trade or business, however a mortgage broker who is a broker of financial instruments is not engaged in a real property brokerage trade or business.

Despite this Chief Counsel Advice, the IRS contended the IRC 469 is clear that mortgage brokerage and loan origination services were not real property trades or businesses. IRS argued that the CCA, rather than establishing a new interpretation of the law, correctly relied upon the statute.

The Court, basing its conclusion on its interpretation of the Code and not on the Chief Counsel Advice, determined that services related to brokering and originating loans do not fall under the definition of operation or brokerage of real property. Neither his mortgage brokerage services nor his loan origination services constituted real property trades or businesses for purposes of IRC 469.

Conclusion

Although the taxpayer worked closely with real property with brokerage services and loan origination services, this did not qualify him as a real estate professional under the real estate passive loss rules. The passive loss rules under IRC 469 continue to be very complex. Proper tax planning involves the proper fact gathering.

Greg I. Nelson, CPA, MBT; Ryan Kelly, CPA, MBT, Mark Angell, CPA, MBT

Olsen Thielen CPAs

www.otcpas.com/blog


Greg Nelson, CPA, MBT





Friday, August 18, 2017

Taxpayers incorrectly claim a deduction for depreciation


Taxpayers incorrectly claim a deduction for depreciation

Allocation of Land and Building

Nielsen, TC Summ. Op. 2017-31

 

Tax Law Background

Section 167(a) allows as a depreciation deduction a reasonable allowance for the exhaustion, wear, and tear of property used in a trade or business. The purpose of the deduction for depreciation is to allow the taxpayer to recover over the useful life of the property its cost or other basis.

The depreciation deduction for any tangible property generally is to be determined by using the applicable depreciation method, the applicable convention, and the applicable recovery period. Generally, depreciation is computed by using the cost of the property as its basis.

If depreciable property and non-depreciable property such as real property are bought for a lump sum, the cost must be apportioned between the land and the building (including improvements).

In making this allocation, the IRS regulation 1.167(a)-5 provides: In the case of the acquisition on or after March 1, 1913, of a combination of depreciable and non-depreciable property for a lump sum, as for example, buildings and land, the basis for depreciation cannot exceed an amount which bears the same proportion to the lump sum as the value of the depreciable property at the time of acquisition bears to the value of the entire property at that time. The relevant inquiry is the respective fair market values of the depreciable and non-depreciable property (land) at the time of acquisition.

Situation

Taxpayer lived in California and owned several rental properties. The taxpayer purchased 3 properties and included the total purchase price of each property in its depreciable basis. The applicable County assessor’s office showed values of the land ranging from 31% to 44%. The taxpayer agreed that there should be an allocation of land but also argued that the County assessor’s value was excessive.

Decision

The Tax Court concluded that the taxpayer incorrectly included non-depreciable land in the basis for the depreciation deduction for these rental properties. The taxpayer was unable to show any burden of proof as to the value of land so the County assessor’s value was allowed.

 

Conclusion

When purchasing real property; there needs to be a reasonable method when allocating the cost between buildings and land. Make sure to use a reasonable valuation method of allocation such as a qualified real estate appraisal or even perhaps the County tax records.

Greg I. Nelson, CPA, MBT; Ryan Kelly, CPA, MBT

Olsen Thielen, CPAs

www.otcpas.com/blog


Greg Nelson, CPA, MBT





Friday, August 18, 2017

Work in Exchange for Economic Gain is Taxable Income


Work in Exchange for Economic Gain is Taxable Income

Welemin, TC Summ. Op. 2017-54

Tax Law Background

The fair market value of goods and services received from another person in a barter arrangement is treated as gross income for tax purposes.

The term "gross income” is broadly defined in the code to include all income from whatever source derived. Gross income encompasses compensation for services, including fees, commissions, fringe benefits, and similar items.

Situation

The taxpayer Welemin and his family rented a home in an apartment in California. Mr. Welemin was a handyman by trade. The taxpayer was falling behind on rent payments. To avoid eviction the taxpayer made an informal arrangement with the lessor to provide repair and maintenance services in exchange for reduced rent. The lessor issued a 1099-Misc for $12,000, and the taxpayer disagreed both with this amount, and the fact that he should have to report it as gross income. The taxpayer intentionally omitted this income from his tax return.

Decision

The court ruled that Mr. Welemin should have reported his services rendered as taxable income. Due to the omission of the income altogether, it was concluded that the taxpayer was also liable for an accuracy related penalty.

Conclusion

Bartering is a taxable transaction. If engaging in barter transactions, be sure to properly report these transactions as the fair market value of services received in gross income. Note that the payor is also responsible for submitting the year end Form 1099-MISC to the payee.

Greg I. Nelson, CPA, MBT; Ryan Kelly, CPA, MBT

Olsen Thielen, CPAs

www.otcpas.com/blog

 


Greg Nelson, CPA, MBT





Tuesday, August 02, 2016

Taxpayers qualifies for Home Sale Exclusion due to increased family size


Private Letter Ruling 201628002

 

Tax Law Background

 

A taxpayer can exclude up to $250,000 of gain ($500,000 for married taxpayers filing jointly) from the sale or exchange of a home owned and used by him/her as a principal residence for at least two of the five years before the sale.The full $250,000/$500,000 exclusion does not apply if, within the 2-year period ending on the sale date, there was another home sale by the taxpayer to which the exclusion applied, but the taxpayer may still be eligible for a reduced maximum exclusion when his/her failure to satisfy the ownership and use requirements is primarily due to the occurrence of unforeseen circumstances

 

Situation

 

Facts: Taxpayers were married and had a daughter when they first purchased their residence. Their residence is a condominium with two small bedrooms and two baths. The child's bedroom also served as the Husband's home office as well as a guest room. After the purchase of their residence, the Wife became pregnant and gave birth to a son. The taxpayers moved out of within the 2 year exclusion period and purchased a new residence.

The taxpayers requested a ruling that the gain on the sale of their residence may be excluded under the reduced maximum exclusion.

 

Decision

 

The Private letter Ruling concluded that the occurrence of unforeseen circumstances was the primary reason for the sale and that the suitability of their residence materially changed. Accordingly, the gain on the sale of residence can be excluded under the reduced maximum exclusion of gain.

 

Conclusion

 

Note that a Private Letter Ruling applies specifically to that taxpayer’s situation. It does not establish a safe harbor for all taxpayers. It does however; give taxpayers in similar situations the opportunity to request their own Private Letter Ruling to determine if they can qualify for the reduced principal residence exclusion under the unforeseen circumstances test.

 

Greg Nelson, CPA, MBT; Ryan Kelly, CPA, MBT; Mark Angell, CPA, MBT

Olsen Thielen CPAs

www.otcpas.com

August 2, 2017


Greg Nelson





Saturday, March 05, 2016

Certificate of Rent Paid - Minnesota


Certificates of Rent Paid (CRP)- What is my obligation as a landlord?

Minnesota Department of Revenue has recently issued a bulletin (3/4/16) concerning the CRPs.

Certificates of Rent Paid (CRP)

All rental property owners, managers, or operators must provide a Certificate of Rent Paid (CRP) to each person who rented from them during the previous year unless they are qualify for the specific exemptions.

CRPs are due January 31

What if my tenant didn't receive a CRP or received an incorrect CRP?

If a landlord refuses to issue a CRP, or fix an incorrect CRP, the tenant may request a Rent Paid Affidavit (RPA) from us. To request an RPA, call the MN Department of Revenue at 651-296-3781 or 1-800-657-9094 (toll-free).  The tenant will need to provide information about themselves and their landlord when requesting an RPA

For more explanation and guidance here is the link: http://www.revenue.state.mn.us/individuals/prop_tax_refund/

 

Greg Nelson, CPA, MBT and Mark Angell, CPA, MBT

Olsen Thielen CPAs

www.otcpas.com

March 5, 2016



Greg Nelson - Olsen Theilen CPAs





Saturday, March 05, 2016

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