Michael Gray, CPA's

Real Estate Tax Letter

July 2, 2010
© 2010 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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Happy 4th of July!

This Sunday is Independence Day. It's a great time to reflect on the principles our country was founded on. To me, these include limited government, self reliance and freedom of expression and action. These are challenging ideals to preserve.

Have a happy and safe holiday.

Our office will be closed on Monday, July 5.

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The year is half over!

Kind of sneaked up on you, didn't it? Is it time to redouble your efforts to meet your goals for this year? How can we help?

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Michael and Janet Gray's vacation schedule.

Janet and I are headed to Washington state for a family-oriented vacation. I'll be out of the office from July 19 through 23. If you need help during that time, call Thi Nguyen, CPA at 408-918-3163.

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Do you need help with finishing extended income tax returns, preparing amended income tax returns, or tax audits?

Now that April 15 has passed, it's time to focus on finishing extended income tax returns. Some of our readers have found errors in or are uncomfortable with tax returns that they prepared using tax software or were prepared by other tax return preparation companies. We can provide a second opinion. Others have received notices for tax audits and sometimes can't get the help they need from their tax return preparer. We can help with all of these. To make an appointment, call Dawn Siemer Mondays, Wednesdays or Fridays at 408-918-3162 from 9 a.m. to 5:00 p.m. Pacific Time.

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Is the San Jose Real Estate Investors Association for you?

Michael Gray, CPA is an affiliate member of the San Jose Real Estate Investors Association (SJREI). This is a great educational and mutual support organization. The exchange of information among the participants is as helpful as the presentations by the speakers. If you are interested in investing in real estate, I highly recommend it. The next East Bay chapter meeting will be held at the Hyatt Place Dublin next Wednesday, July 7, at 7 p.m. The next South Bay chapter meeting will be held at the Biltmore Hotel in Santa Clara next Thursday, July 8 at 7 p.m. The next Mid-Peninsula chapter meeting will be held at the Crowne Plaza Hotel in Foster City Tuesday, July 20 at 7 p.m. For details, visit their web site at www.sjrei.net.

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Congress extends closing date for Homebuyer Tax Credit.

Congress has passed the Homebuyer Assistance and Improvement Act of 2010, H.R. 5623. The new law extends the closing date deadline to qualify for the Homebuyer Tax Credit from June 30, 2010 to September 30, 2010 for homebuyers who signed sales contracts before May 1, 2010. The House Ways and Means Committee estimates that the extension will enable 180,000 more homebuyers to qualify for the credit.

The new law also tightens up disclosure rules so that prisoners who are incarcerated at the time they buy a home won't be able to claim the credit.

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Transferee liability applied to residence transferred to adult child.

An individual cared for his elderly father. The father transferred his residence to his son for a token consideration. The father owed unpaid income taxes to the Internal Revenue Service. The residence, a condominium, was subject to Florida's Uniform Fraudulent Transfer Act. Homestead property is not exempt under non-bankruptcy law because it is reachable for judicial collection enforcement.

The Tax Court found the son was subject to transferee liability for debts due to the IRS up to the fair market value of the condominium.

(Brubenstein v. Commissioner, 134 TC No. 13.)

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Lease rental collections aren't income of property manager.

The IRS ruled that rental income collected by a property manager as the agent of property owners is not gross income for the property manager.

(Letter Ruling 201019008.)

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Property tax appeals.

California real estate owners should be receiving notices of assessed value for their properties about now. The Santa Clara County Assessor has attempted to make valuation adjustments for property value declines. If you feel your property has been overvalued, you may file an appeal. In Alameda, Ino, Kings, Monterey, Orange, Placer, San Francisco, San Luis Obispo, Santa Clara, Sierra, Sutter and Ventura Counties, the time during which an appeal may be filed is July 2, 2010 through September 15, 2010. The deadline for other California counties is November 30, 2010.

You might be able to avoid having to file a formal appeal if you talk to a representative at the county assessor's office first.

Remember you must pay your property tax bill on time, even if you have an appeal in process.

Here is a list of links to county assessors' offices: www.boe.ca.gov/proptaxes/assessors.htm

Let us know if you want our help to prepare an appeal.

(Spidell's California Taxletter®, June 1, 2010, page 64.)

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Does your out of state LLC have to pay a California tax?

The Franchise Tax Board has recently said that some out of state LLCs owned by California taxpayers may not have to pay the annual California tax. In most cases, ownership of an out-of-state LLC by a California resident that is actively involved in the business of the LLC is sufficient to be considered "doing business in California" and subject to the annual California tax and fee. If the California resident member is purely passive and has no right to and, in fact, does not act on behalf of the foreign LLC in any capacity, that member's ownership would not deem the foreign LLC to be doing business in California.

If the out of state LLC was formed solely for asset protection purposes, such as to hold a vacation property, and the LLC has no business activity, the LLC is not "doing business in" California and therefore not subject to California's annual fee and tax. The exception will not apply if there was any rental income for the property or if it was advertised as available for rent.

(Spidell's California Taxletter®, June 1, 2010, page 67.)

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California New Home / First-Time Buyer Credit going fast.

As of June 29, 2010, the Franchise Tax Board has received 20,960 applications for the New Home Credit. They plan to accept about 28,000 applications, and they haven't processed any yet. Here is a web site where the cumulative total is posted and there is more information about the credit: www.ftb.ca.gov/individuals/New_Home_Credit.shtml.

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"No interest deduction allowed when payment marked "principal."

Taxpayers marked payments on loans as "principal" and then tried to characterize the payments as interest or fee payments. They issued Forms 1099 showing the amounts paid as interest and fee payments. The Tax Court found the notations were an "admission against interest," and disallowed the deductions for the interest.

(Nelson v. Commissioner, TC Memo 2010-96.)

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Real estate professional didn't qualify for passive activity loss exception.

Anjum Shiekh owned several rental properties, which he personally managed. He was successful in establishing that he was a real estate professional because more than one-half of the personal services performed by the taxpayer during the tax year were performed in real property trades or businesses and he performed more than 750 hours of services in the real property trades or businesses.

He did not file an election for all of his rental properties as one rental activity. Consequently, he did not meet the material participation requirements under the passive activity loss rules and the Tax Court upheld the IRS in suspending his rental losses based on the passive activity loss limitations.

Mr. Shiekh also failed to establish that an area of his home was used exclusively as a home office, so his deductions for home office expenses were disallowed.

Mr. Shiekh claimed travel expenses for investigation of new rental properties in Colombia. The Tax Court upheld the IRS in disallowing those deductions for lack of substantiation. The Court wasn't satisfied that the trip wasn't in fact a vacation.

Mr. Shiekh also claimed travel expenses for investigation of new rental properties in California. He did not purchase any properties as a result of the trips. The Tax Court upheld the IRS in requiring these expenses to be capitalized as acquisition expenses. A loss could be claimed when the search for new properties is abandoned. The Court wasn't satisfied that Mr. Shiekh has abandoned his search at the end of the tax year in question.

A point to note is Mr. Shiekh represented himself in this proceeding. He might have also prepared his own income tax return. If he had sought professional help in preparing the tax return and in the court hearing, he might have had a more favorable result. A tax return preparer might have pointed out the documentation requirements for travel expenses, the requirement for exclusive use to qualify for a home office deduction, and that an election should be made to treat all rental properties as one to avoid the passive activity loss limitations.

A tax professional also might have been more successful in reducing the damage from the tax audit.

(Anjum Siekh v. Commissioner, T.C. Memo. 2010-126, June 10, 2010.)

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Tax extenders bill dies in the Senate.

The Republicans blocked tax extender legislation included in an unemployment extender bill with a filibuster in the Senate. This is one of the most difficult tax planning years in recent memory because the Bush tax cuts expire after 2010.

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Financial Insider Weekly broadcast schedule for July and August.

Financial Insider Weekly is broadcast in San Jose and Campbell on Wednesdays at 4:30 p.m., Pacific Time. Starting August 17, the broadcast time will change to 7 p.m. You can watch it on Comcast channel 15 for those cities. 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, Attorney Scott Haislett, "1031 exchanges of real estate"
July 14, Attorney Scott Haislett, "Sale of a principal residence"
July 21, Attorney Naomi Comfort of Hawks & Comfort, LLP, "Special needs trusts"
July 28, Peggy Martin, ChFC of The Family Wealth Consulting Group, "The role of life insurance in your estate and financial planning"
August 4, Geraldine Barry, President of San Jose Real Estate Investors Association, "How I got started investing in real estate"
August 11, Professor Patricia Cain of Santa Clara University, School of Law, "Recent developments for federal taxation of California registered domestic partners"
August 18 Scott Haislet, Attorney and CPA, "California Short Sales and Foreclosures"
August 25 To be announced

Financial Insider Weekly is also broadcast as follows:

Back episodes available at https://www.youtube.com/user/financialinsiderweek.

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.


I am reading your book (Real Estate Tax Handbook – 2008 Edition). A sub-heading in the chapter on 1031 exchanges asks the question, "Is an election required?" Does this mean that if a taxpayer were to perform an exchange through an intermediary, he or she must report an exchange on his or her income tax return?


Yes. Section 1031 is not an elective section. If you structure a transaction as a tax deferred exchange, it must be reported as one.

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Follow me on Twitter!

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.

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I have also started a blog at www.michaelgraycpa.com. Check it out!

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Michael Gray, CPA
2482 Wooding Ct.
San Jose, CA 95128
(408) 918-3162
FAX: (408) 938-0610
Hours: 8am - 5pm PDT Monday - Friday

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