Michael Gray, CPA's

Real Estate Tax Letter

March 9, 2011

© 2011 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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Tax season is here! Make your appointment now!

There is less than a month and half before April 18.

To have us prepare your income tax returns, start with the online Tax Notebook organizer. Call Dawn Siemer at 408-918-3162 for instructions to get started. We also have a paper organizer, if you prefer. We still need your documents (W-2s, 1099s, receipts for donations) to prepare your income tax returns.

We can prepare most income tax returns using information provided online and by mail. If you wish a personal meeting, please call Dawn Siemer at 408-918-3162 to schedule an appointment. Our calendar is filling up fast!

We expect to file for extensions when we receive clients’ tax information after March 15.

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Corporate due date for calendar year returns is March 15.

The due date for 2010 calendar year corporate income tax returns, including for S corporations, is March 15. Although many corporations will apply to extend the due date for their income tax returns, there is no extension for paying the tax. That means they need to have a pretty good estimate of what their income is before that due date. Now is the time to get those extension computations in process with your tax return preparer.

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IRS offers new voluntary offshore disclosure initiative.

Taxpayers who failed in 2009 to “catch up” with their disclosure forms for offshore bank accounts, investment accounts and trusts have another opportunity to get in compliance with the disclosure requirements.

Taxpayers may catch up by filing the late forms for 2003 to 2010 no later than August 31, 2011. However, the penalties aren’t totally eliminated. Taxpayers must pay a penalty of 25% of the amount in the foreign bank account in the year with the highest aggregate account balance from 2003 through 2010. If the assets didn’t exceed $75,000 in any year, the taxpayer may qualify for a reduced 12.5% penalty.

There are also exclusions from penalties if there was no unreported income with respect to the assets.

Taxpayers who have undisclosed accounts should consult with their tax advisors now to get in compliance. The information now required on separate forms will eventually have to be reported directly on individual income tax returns, increasing risk of discipline for tax return preparers who fail to disclose the accounts. There are also potential criminal penalties, including prison penalties, for failure to comply. This is not a matter to be taken lightly.

(Look up the 2011 Offshore Voluntary Disclosure Initiative Frequently Asked Questions and Answers at the IRS web site, www.irs.gov. IR-2011-14.)

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Appeals Courts disagree about understatement of income.

The Fourth Circuit and Fifth Circuit Courts of Appeals recently agreed with the Ninth and Federal Circuits that an understatement of income extending the statute of limitations from three years to six years doesn’t apply when the tax basis of property that is sold is overstated.

The six-year statute of limitations applies if the taxpayer omits from gross income an amount of income exceeding 25% of the gross income shown on the income tax return.

The Seventh Circuit held against the taxpayer on the same issue in Beard. The IRS has issued regulations after the years at issue that state an overstatement of tax basis of property that is sold can result in an understatement of income, resulting in an extension of the statute of limitations.

(Home Concrete & Supply, LLC, CA-4, February 7, 2011; Burks, CA-5, February 9, 2011; Beard, 2011-1 USTC ¶ 50,176, CA-7, January 1, 2011.)

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Franchise Tax Board stops accepting First-Time Buyer applications.

The California Franchise Tax Board stopped accepting First-Time Buyer applications for the California First-Time Home Buyer Credit as of midnight, August 15, 2010. They are still accepting New Home Credit applications. New homes closing escrow in 2011 are only eligible for the New Home Credit if the home is purchased under an enforceable contract executed no later than December 31, 2010.

Here is a link to a blog post with some details. michaelgraycpa.com/2010/05/28/california-credits-for-new-homes-and-first-time-buyers-will-go-fast/

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Financial Insider Weekly broadcast schedule for March and April.

Financial Insider Weekly is broadcast in San Jose and Campbell on Wednesdays at 7:00 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 the rest of March and April:

March 9, Lamarr Baxter, Entrust Administration, “Making alternative investments besides real estate using your IRA or Roth Account”
March 16, Professor Patricia Cain, Santa Clara University, “Income tax problems of same sex couples”
March 23, Professor Patricia Cain, Santa Clara University, “Estate and gift tax problems of same sex couples”
March 30, Don Pollard, Advanced Professionals, “Individual medical insurance.”
April 6, Don Pollard, Advanced Professionals, “Business group medical insurance”
April 13, Tom Oviatt, Wymac Capital, “Home mortgage market developments”
April 20, Greg Carpenter, BTI Group M & A, “How to prepare to sell a business”
April 27, Phil Price, EA, The Price Company, “Qualified retirement plans for small businesses”

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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Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter.

Questions and Answers

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 did a short sale on my residence last year. I bought it for $380,000 and sold it for $230,000. The bank said they would forgive my debt, but I received a 1099-S form for $150,000. Do I have to report this?


The figures don’t seem to jive.

Form 1099-S is the form for reporting the gross proceeds from the sale of real estate. The form should show the $230,000 sales price of the home. You should report the sale of your residence on Schedule D, but limit the loss to zero as a personal use asset.

If you received a Form 1099-C for cancellation of indebtedness that qualifies for the exclusion for cancellation of qualified indebtedness for a principal residence, it is reported using Form 982. Check the box at Part I, item e and indicate the amount at Part I, item 2. See my article on short sales and foreclosures at www.realestateinvestingtax.com/shortsale.shtml.

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Follow me on Twitter, Facebook and LinkedIn!

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 and LinkedIn.

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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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