Michael Gray, CPA's

Real Estate Tax Letter

March 12, 2012

© 2012 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 only about a month before the tax return due date.

If we prepared your income tax returns last year, you should have already received instructions in the mail. If you haven’t, please call Dawn Siemer at 408-918-3162.

Our goal is to have every individual income tax return for which we have received complete information by March 15 completed by the April 17 due date. Any tax returns for which we receive information after March 15 will probably be on extension.

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, property tax bills, auto registration bills, receipts for donations) to prepare your income tax returns.

We have a secure internet portal for sending documents. Email Dawn Siemer at dgsiemer@taxtrimmers.com for instructions.

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!

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Corporate due date for calendar year returns is March 15.

The due date for 2011 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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Remember the second California real estate tax payment is due April 10.

There is a nasty penalty for late payment, and the due date is weird.

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Form 1099-K reporting eliminated.

The IRS won’t be requesting a separate disclosure of revenues received from merchant account (credit card) transactions and payment services like Pay Pal on business income tax returns, after all.

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California doesn’t accept federal SE tax deduction amount.

The Franchise Tax Board has announced that the federal amount for self-employment tax isn’t acceptable for California tax reporting. The IRS changed the deduction amount to 59.6% of the social security portion of the self-employment tax because of the 2% reduction of "employee" social security tax for 2011 and 2012. California still limits the deduction to 50% of the self-employment tax.

If you are subject to self-employment tax, be sure to download the latest version of your tax return preparation software. You shouldn’t submit the tax return until you see an adjustment for the self-employment tax deduction on Schedule CA.

This could delay processing for many taxpayers.

The Franchise Tax Board just issued an announcement that taxpayers who already filed their income tax returns without a California adjustment for the self employment tax deduction should not file an amended income tax return to fix it. The Franchise Tax Board will send a letter with a proposed adjustment for this item.

This late announcement will make many taxpayers and tax return preparers very grumpy this year.

(Spidell’s California Taxletter, March 1, 2012, page 36.)

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Payroll tax reduction extended.

Just in case you’ve been in a cave for the last month, the 2% reduction in employee social security tax from 6.2% to 4.2% has been extended for the rest of 2012. Be sure to update your payroll processing software, if applicable.

It seems like the beneficiary of this tax break is the gasoline companies, since they are hiking their gas prices now. Oh well…

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Late return reminder.

The IRS has issued a reminder that the last day to file a late income tax return for 2008 and receive a refund is April 17, 2012. After that date, the refund is forfeited.


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IRS gives relief for missed estate tax extension.

Under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, the estate of a decedent who is survived by a spouse may elect to permit the surviving spouse to use the decedent’s unused estate tax exclusion. For example, if Bob was deceased during 2011, his potential exclusion was $5 million. If his taxable estate before the exclusion was $2 million, he had $3 million of unused exclusion. If the portability election is made, his surviving spouse, Betty, can add Bob’s unused exclusion to her own. (This is highly simplified. See an estate planning or tax advisor for details.)

In order to make the election, a federal estate tax return, Form 706, must be filed for the decedent. The normal due date for the federal estate tax return is nine months after the date of death. An automatic six-month extension is available, provided the estate files Form 4768 by the original due date.

Since the details of the election were announced late, the estate may not have requested an extension, because no tax may have been due and the executor may have thought no estate tax return needed to be filed.

The IRS has announced that an automatic six-month extension has been granted to these estates when no Form 4768 extension form was timely filed. In order to qualify, the estate must meet the following additional requirements.

  1. The decedent must be survived by a spouse.
  2. The decedent’s date of death must be after December 31, 2010 and before July 1, 2011; and
  3. The fair market value of the decedent’s gross estate must not exceed $5,000,000.

(Notice 2012-21.)

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Taxpayers lose homebuyer credit – didn’t move in time.

Taxpayers bought a new home on July 28, 2009, for which they claimed the first-time homebuyer credit. They sold their previous residence on June 6, 2007. They had continued to use the old house, which was still furnished, and listed the residence as their address on their joint income tax return.

The taxpayers claimed they had moved out of the residence where they were living with the wife’s parents after listing the old house for sale in February 2006 and were living an apartment after June 1, 2007.

In order to qualify for the first-time homebuyer credit in 2009, the taxpayer must not have owned a principal residence during the three-year period before buying the new home.

The Tax Court wasn’t persuaded that the old residence was not being used as a principal residence during the three-year period, so the first-time homebuyer credit was disallowed.

(Foster, 138 TC No. 4, January 31, 2012.)

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Tax deductions lost because they couldn’t be substantiated.

Carl Oser was in the real estate business for over sixty years. He hadn’t sold any properties as a real estate broker for fifteen years.

He claimed deductions on Schedule C for his real estate brokerage business for 2006 and 2007, but couldn’t substantiate those expenses when the IRS audited his income tax returns. He couldn’t even provide a basis for estimating the expenses. The Tax Court upheld the IRS in disallowing those deductions.

Mr. Oser also claimed expenses for 57 properties on Schedule E for 2006 and 2007. The IRS auditor determined that 50 of those properties had been previously transferred or sold to family members, and weren’t owned by Mr. Oser. The Tax Court upheld the IRS in disallowing 50/57 of the rental expenses.

This case again illustrates the importance of keeping good records and keeping the accounting for family properties in order.

(Orser, T.C. Summary Opinion 2012-19, March 1, 2012.)

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Charitable contribution disallowed for donation of house to fire department.

The Seventh Circuit Court of Appeals has upheld a Tax Court decision disallowing a charitable contribution deduction for a gift of a home to a fire department for firefighting practice.

The home was still on the original site for which the taxpayer still owned the land. The taxpayers received a benefit for the demolition of the home that exceeded the estimated value of the house.

(Rolfs, 2012-1 U.S.T.C. ¶ 50,186, February 8, 2012.)

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Deductions for conservation easements reduced.

The Tax Court revalued conservation easements made by a corporation and some individuals to an amount lower than the amount claimed by the taxpayers and greater than the amount computed by the IRS. The Court reversed a 20% accuracy-related penalty asserted by the IRS.

The taxpayers had substantiated their deductions with appraisals by qualified appraisers.

The taxpayers argued the before highest and best use of the properties was gravel mining. The Tax Court agreed with the IRS that the highest and best use of the properties was agricultural. The Court said it didn’t think it was likely that a prospective buyer for the properties would use the site as a gravel mine.

The substantial understatement of tax penalty doesn’t apply when the taxpayer can demonstrate (1) reasonable cause for the underpayment and (2) that the taxpayer acted in good faith with respect to the underpayment. The Court said the taxpayer met these requirements.

(Esgar Corporation et. al., T.C. Memo 2012-35, February , 2012.)

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MidPeninsula Media Center broadcasts Financial Insider Weekly.

We have added another public access station to the group broadcasting my weekly show. It’s Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton. The show is broadcast on Saturdays at 9 a.m. and 6 p.m.

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Financial Insider Weekly broadcast schedule for March and April.

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 March and April:

March 9, 2012, Lamarr Baxter, The Entrust Group, "Making alternative investments besides real estate using your Roth or IRA account"
March 16, 2012, Alan L. Nobler, attorney at law, "How a collaborative team can help preserve your legacy"
March 23, 2012, Raymond Sheffield, attorney, Sheffield Law Office, "Estate and gift tax problems for a non-citizen spouse"
March 30, 2012, Raymond Sheffield, attorney, Sheffield Law Office, "Estate planning for retirement accounts"
April 6, 2012, Raymond Sheffield, attorney, Sheffield Law Office, "A survey of estate planning basics"
April 13, 2012, Robert E. Temmerman, Jr., attorney, Temmerman, Cilley & Kohlmann, LLP, "I’m an executor! Now what?"
April 20, 2012, Robert E. Temmerman, Jr., attorney, Temmerman, Cilley & Kohlmann, LLP, "I’m a trustee! Now what?"
April 27, 2012, Richard H. Lambie, professional fiduciary, "The role of the professional fiduciary"

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.

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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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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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