Michael Gray, CPA's

Real Estate Tax Letter

November 2, 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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Happy Thanksgiving!

That's right! It's here already! Thanksgiving falls on Thursday, November 24 this year.

We hope you will be able to celebrate Thanksgiving with family and/or friends. Thanksgiving was once the favorite holiday of my grandson, Panch Baker, because he got to celebrate it with both sets of grandparents. (I think Halloween might be his favorite right now.)

Thanksgiving seems to be an appropriate time for us to say, "Thank you!", especially to our clients, but also to you who read this newsletter and our many friends who refer clients to us and make our business possible.

Have a happy and safe holiday!

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It's time for year-end tax planning.

With the coming holidays, continuing education days, and a planned vacation for the third week of December, Michael Gray will have very limited availability for year-end tax planning meetings. Reserve your appointment now by calling Dawn Siemer on Monday, Wednesday or Friday at 408-918-3162.

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Live Short Sale and Foreclosure seminar by Michael Gray, CPA scheduled for December 9.

On December 9, Michael Gray, CPA will be speaking about "Tax Planning For Real Estate Short Sales and Foreclosures". The seminar will take place from noon to 1:30 p.m. at Hobee's Restaurant in the Pruneyard, in Campbell. Lunch is included. The fee for participants is $97. To get more details or make a reservation, call Dawn Siemer on Mondays, Wednesdays or Fridays at 408-918-3162 or visit our website at www.realestateinvestingtax.com/shortsale-seminar.shtml.

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Taxpayer didn't qualify as a "real estate professional".

Passive losses limited. Victor and Francesca Ani claimed losses from their real estate investments weren't subject to the passive activity loss limitations because Victor was a real estate professional. (If either spouse qualifies, a married couple is treated as a real estate professional.) Victor was a barber and he also managed the couple's rental real estate.

In order to qualify, Victor had to satisfy two tests. 1) More than 750 hours had to be worked in qualified activities for the real estate. 2) More than half of his working hours had to be for qualified real estate activities.

Victor's accountant submitted a document to the IRS based on information that Victor provided showing that Victor spent 1,377 hours on barber activities and 956 hours on real estate activities in 2005 and 1,380 hours on barber activities and 886 hours on real estate activities in 2006.

Based on this document, the Tax Court found that Victor failed the second test and was not a real estate professional.

Comment: Nobody likes to be subject to the passive activity loss limitations for their real estate losses. The real estate professional exception is a very hard test to meet when you have another job or profession. Claiming it also makes you an "audit magnet." Be sure that you can document your hours with a diary or calendar and that you qualify when you claim it. Also, you might qualify for some years and not others. See IRS Publication 925 about the Passive Activity and At Risk rules for more information. You can get it free at www.irs.gov.

(Ani v. Commissioner, T.C. Summary Opinion 2011-119 (October 11, 2011).)

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Carryover basis form released.

The IRS has finally released Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent. This is the form to be used for decedents who died during 2010 for whom an election is made to not have the federal estate tax apply. The deadline for the form is January 17, 2012. The IRS says no more extensions will be granted for filing the form.

(Note: California beneficiaries who receive the assets from these estates should be aware that their tax basis (cost for determining taxable gain or loss for a sale) for assets inherited from a person deceased during 2010 may be quite different for federal and California tax reporting. California didn't adopt the federal carryover basis rules, so California beneficiaries will receive a tax basis of the fair market value of the asset on the date of death.)

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No California property tax disclosure, after all.

The Franchise Tax Board (FTB) has announced that disclosure for property tax bills that was initially planned for 2011 income tax returns won't be required after all. The proposal was to list the APN numbers for the properties for which deductions were being claimed. The FTB says it will expand its educational efforts about the property tax deduction, because everything on the bill isn't necessarily tax deductible.

(FTB Tax News Flash, November 1, 2011.)

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Federal estate tax form released for 2011 decedents.

The IRS has released Form 706, Federal Estate Tax Return, for decedents who died in 2011. Since the due date for the form is nine months after death, a 2011 Form 706 could be due as early as October 3, 2011. The executor or personal representative may apply for an automatic six-month extension of time to file the return using Form 4768 by the initial due date. An extension of time to pay the tax may also be applied for, but isn't automatic.

The IRS has said that estates electing to share the decedent's unused exemption with the surviving spouse must file Form 706 to make the election.

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Michael Gray honored as Producer of the Year.

CreaTV, San Jose honored Michael Gray as Producer of the Year at its Annual Meeting on October 26, 2011 for his show, Financial Insider Weekly. Luis Costa of CreaTV noted that Michael is the only producer with shows broadcast over 100 consecutive weeks without a repeat, and as a model of preparation for his recording sessions. For more information about his show, visit the website: www.financialinsiderweekly.com.

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Financial Insider Weekly broadcast schedule for November and December.

Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 8:00 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 November and December:

November 4, 2011, Mark Erickson, attorney, "Divorce – California Style: Child Custody"
November 11, 2011, Naomi Comfort, attorney, The Silicon Valley Elder Law Group, P.C., "Durable Financial Powers of Attorney"
November 18, 2011, John Hopkins, attorney, Hopkins & Carley, "How to promote community giving as a family value"
November 25, 2011, Jeffrey Hare, attorney at law, APC, "Solving legal disputes out of court (alternative dispute resolution)
December 2, 2011, Naomi Comfort, attorney, The Silicon Valley Elder Law Group, P.C., "Special Needs Trusts"
December 9, 2011, Craig Martin, CFP®, The Family Wealth Consulting Group, "Investing In Turbulent Times"
December 16, 2011, Craig Martin, CFP®, The Family Wealth Consulting Group," The Role of the Fee-Only Financial Planner"
December 23, 2011, William Mitchell, CPA, "I'm Being Audited By The IRS! Now What Should I Do?"
December 30, 2011, William Mitchell, CPA, "I Owe Back Taxes To The IRS! Now What Should I Do?"

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. Write mgray@taxtrimmers.com.

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 received an email from a real estate broker that advised me that in 2013 a seller of real estate will have to pay a federal sales tax on the sales price. That this tax was part of the health care bill.

Any truth to this?


There is some truth to it.

It is not a sales tax, but a Medicare tax.

The 3.8% tax will not be based on the sales price of real estate, but gains from the sale of real estate will be included in "investment income" subject to the tax.

The tax will only apply to taxpayers who have more than $200,000 ($250,000 for joint filers or $125,000 for married, filing a separate return) of adjusted gross income.

Congress may revisit the tax, probably after the Presidential Election, relating to general tax reform.

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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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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.

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Check out my blog.

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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