Michael Gray, CPA's

Real Estate Tax Letter

October 3, 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 planning thoughts.

There are some tax plans that take time to implement, such as making a short sale before the end of the year or making a gift of a business interest requiring an appraisal. Now is the time to discuss what actions might be appropriate before the end of 2012.

This is the most difficult year for tax planning that I can remember. I have never seen so many changes that will happen if Congress doesn’t take action, and I can’t imagine that not happening. Nobody knows what the final answers will be, most of which may not be enacted until late next year.

Meanwhile, there are some significant tax benefits to exploit before the year end (like the 15% maximum tax rate for long-term capital gains and the $5 million exemption for gifts and generation-skipping tax) and to avoid for next year (like the Medicare tax on investment income.)

Call Dawn Siemer at 408-918-3162 on Wednesdays from 9 a.m. to 5 p.m. to schedule a tax planning meeting with Michael Gray before his calendar is full.

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October 15 is the end of the 2011 tax return filing season.

Hopefully your 2011 income tax returns were filed long ago. Hooray! Mine is done! There are only two weeks left to file individual income tax returns. If you still haven’t submitted your information to your tax return preparer, better do it immediately. There may not be enough time to get it done on time. Also, remember 2011 retirement plan contributions for sole proprietorships, including SEPs (simplified employee pensions) must be made by October 15, 2012 in order to deduct them for 2011.

If you would like our help, call Dawn Siemer on Mondays, Wednesdays and Fridays from 9 a.m. to 5 p.m. Pacific Time to make an appointment. Dawn’s telephone number is 408-918-3162.

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Dawn Siemer returns after maternity leave.

Dawn’s daughter, Minerva, was born two months ago and Dawn is returning to work part time as our web master and office manager. Grandma Janet will be watching Minerva in the mornings and Kara in the afternoons. Say a prayer this all works out smoothly.

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New book about investing using Roths and IRAs to be released this month.

How to use Roth and IRA accounts to provide a secure retirement, - 2012 Edition by Michael Gray, CPA will be released this month. For the month of September, 2012, you can buy it for half price - $

Introductory offer for How to use Roth & IRA accouts to provide a secure retirement expires October 15.

Our half-price offer for How to use Roth & IRA accounts to provide a secure retirement, - 2012 Edition expires October 15, 2012. For more information, go online to Silicon Valley Publishing Company. You can also call your order to Dawn Siemer at 408-918-3162.

The book is 76 pages, and is packed with insights, including Roth Conversions, a comparison of Roth to regular IRA accounts, self-directed accounts, alternative investments, prohibited transactions, when Roth and IRAs pay income taxes and much more.

After you read the book, please post a book review at Amazon.com and bn.com.

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Electronic formats offered for our new books.

You can get a Kindle version of or new books about Employee Stock Options and Roths and IRAs at Amazon.com. You can also get a Nook compatible version at bn.com. Search “Michael Gray CPA”.

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Start-up expenses weren’t currently deductible.

The Tax Court upheld the IRS in disallowing a current deduction for $61,779 of business expenses relating to real estate activity. The taxpayer bought a duplex in February 2007 and rehabilitated it. The duplex wasn’t offered for rent until 2009. The taxpayer hired a tax return preparer for his 2007 income tax return, and the preparer reported the expenses on Schedule C for that year.

The Tax Court found that the expenses were incurred before starting business operations, and denied the deductions as start up expenses.

The Tax Court didn’t consider an alternative assertion by the IRS that the expenses should have been capitalized and depreciated.

(Lawrence E. McPartland v. Commissioner, T.C. Summary Opinion 2012-88 (September 5, 2012.))

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Business travel deduction not allowed for Fiji trip.

The Tax Court upheld the IRS in disallowing business travel expenses for a trip to Fiji. The taxpayer failed to produce contemporaneous records showing the business purpose for the trip. The taxpayer did purchase a rental property later, but the property wasn’t rented for more than five years. The Tax Court believed the IRS assertion that the primary purpose of the trip was a vacation.

(Eli D. Kohn v. Commissioner, T.C. Summary Opinion 2012-86 (September 4, 2012.))

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Current deduction disallowed for passive activity losses.

The Tax Court upheld the IRS in disallowing passive activity losses from rental real estate. The Tax Court didn’t accept the taxpayers were real estate professionals. The husband and wife were full-time civilian employees of the Department of the Navy. The time spent on the real estate activity didn’t constitute more than one-half of the service hours for either spouse.

In addition, the taxpayers had more than $150,000 of adjusted gross income, so they didn’t qualify for the $25,000 annual allowance for material participation real estate.

(Frederick T. Chambers and Janice K. Chambers v. Commissioner, T.C. Summary Opinion 2012-91 (September 12, 2012.))

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S corporation tax benefit may be expiring.

2012 may be the last chance for S corporations to pay out accumulated C corporation earnings at a low tax rate to secure other benefits later. See this blog post. michaelgraycpa.com/2012/09/12/last-chance-for-s-corporation-shareholders-to-pay-low-tax-now-for-avoiding-high-penalty-tax-later/.

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New IRS guidelines allow more taxpayers to reduce their tax debts.

The IRS has relaxed its requirements to qualify for an offer in compromise. See this blog post: michaelgraycpa.com/2012/09/06/can-your-unpaid-federal-tax-bill-be-reduced-or-cancelled/.

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California enacts new private pension law.

Governor Jerry Brown signed into law S.B. 1234, the California Secure Choice Retirement Savings Trust Act on September 28, 2012. Under the Act, California employers would be required to withhold 3% of wages of employees who aren’t participating in an employer retirement plan. The wages would be deposited in an individual account in a Retirement Trust administered by the state of California. It is intended that the account will qualify as an individual retirement account (IRA) under the federal tax laws. Employers might alternatively be able to deposit the funds in a privately administered IRA for the employee.

Employees may opt out of having the withholding program. Union employees would be exempt from the program.

Employers won’t be required to implement the program until the details are worked out, including whether the Retirement Trust will qualify as an IRA.

Implementation will be staggered, so that employers with more than 100 eligible employees will implement first, more than 50 eligible employees three months later, and the rest of employers after another three months.

The employer will not be subject to the federal rules relating to retirement plans under the Employee Retirement Income Security Act (ERISA) because this is not an employer-sponsored plan.

Since employees can already participate in an IRA, time will tell what the impact of the legislation will be. Employees who are having trouble paying their bills will probably opt out of the program. Employers will suffer additional administration expenses to withhold and deposit the funds through their payroll procedures, educate employees about the program, and collect and retain opt-out forms.

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Community public access television needs our help.

Public access television is a vital part of our educational outreach to various communities. These are usually nonprofit, charitable organizations, like public television stations. Unlike those stations, most of the programming for the public access stations comes from local producers.

This programming includes the local arts, productions by students at local schools, community outreach by churches, independent local producers discussing current social issues, educational programming by local providers like ourselves and much more. In other words, public access television makes a unique, important contribution to the communities it serves.

With the difficult times we are experiencing, many public access stations are facing severe financial challenges, and might not survive without more community financial support. I urge you to consider making a donation to your local public access television station. Here is a link for a list of public access television stations in California: http://www.communitymedia.se/cat/linksca.htm.

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Financial Insider Weekly broadcast schedule for October and November.

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 October and November:

October 5, 2012, Peter Moss, Wymac Capital, Inc., “Big picture strategies for the home mortgage marketplace”
October 12, 2012, Lori Greymont, CEO, Summit Assets Group, “Real estate investment opportunities in Atlanta”
October 19, 2012, Lori Greymont, CEO, Summit Assets Group, “Different ways to invest in real estate”
October 26, 2012, Naomi Comfort, attorney, Silicon Valley Elder Law P.C., “The role of financial capacity in elder law”
November 2, 2012, Naomi Comfort, attorney, Silicon Valley Elder Law P.C., “Using Powers of Appointment to provide asset protection and flexibility”
November 9, 2012, Kathleen Wright, attorney, American Red Cross, “Financial preparation for a disaster”
November 16, 2012, Emmett Carson, PhD, CEO, Silicon Valley Community Foundation, “How to promote community giving as a family value”
November 23, 2012, Phil Price, EA, The Price Company, “Qualified Retirement Plans for closely-held business”
November 30, 2012, William Mahan, attorney, of counsel to Gates Eisenhart Dawson, “Tax and financial considerations of title”

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.


We have a rental home that we might move into as our residence. Can the unclaimed passive losses be transferred to another rental or be part of a "pool" of passive losses?


The unused passive losses are still carried forward under the residence as a "former passive activity." They can be recovered against other passive activity income or when you sell the home.

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Follow me on Twitter, Facebook, LinkedIn and Google+!

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, LinkedIn, and Google+.

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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.

Have employee stock options? Subscribe to our free newsletter, Michael Gray, CPA's Option Alert! To learn more, visit stockoptionadvisors.com/subscribe.shtml.

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Check out my blog.

I have also started a blog at 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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