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The September 2015 newsletter focusing on tax issues for the homeowner and real estate investor, by certified public accountants in California.
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Michael Gray, CPA's

Real Estate Tax Letter

Michael Gray, CPA's Real Estate Tax Letter

September 10, 2015

© 2015 by Michael C. Gray
ISSN 1930-0387

A monthly report focusing on tax issues for the homeowner and real estate investor.

Table of Contents

Dawn Siemer's hours are changing.

Starting next week, Dawn will be working Mondays, Tuesdays and Thursdays. You can still reach her at (408) 918-3162 and leave a message any time.

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Third estimated tax payments and extended calendar-year business income tax returns are due September 15.

The extended due dates for calendar-year corporations, partnerships and trusts is September 15. Be sure to get the information for your extended return to your tax return preparer right away. If you need us to prepare your tax return, call Dawn Siemer on Monday, Tuesday, or Thursday at 408-918-3162 for an appointment.

The third quarter federal estimated tax payment due date for individuals, calendar-year trusts and most calendar-year corporations is September 15. California doesn't have a third quarter estimated tax payment due on September 15 because the first two payments are "front-loaded." In some cases, taxpayers will "catch up" on unpaid California estimated tax payments on September 15.

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October due date is coming for individual income tax returns.

In case I get snowed and don't get out an October newsletter before October 15, remember that is the due date for extended individual income tax returns. Get the information to finish your tax returns to your tax return preparer right away. If you need us to prepare your tax return, call Dawn Siemer on Monday, Tuesday, or Thursday at 408-918-3162 for an appointment.

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Gain from sale of residence was taxable when it was reacquired.

The Eighth Circuit Court of Appeals upheld the Tax Court and the IRS in finding a taxpayer wasn't eligible for the exclusion for the sale of a principal residence when the taxpayer reacquired the residence.

The taxpayer sold his principal residence on an installment basis in 2006 for more than $1 million. He excluded $500,000 of gain as the sale of a principal residence. He received $505,000 installment payments and reported $57,000 installment sale gain for 2006 through 2008.

In 2009, the buyers defaulted and the taxpayer reacquired the property. The taxpayer kept the $505,000 previously received as liquidated damages. The taxpayer didn't resell the property.

Under the exclusion rules for the sale of a residence, gain isn't taxable from the reacquisition of property, except to the extent the money received exceeds the gain previously reported. In this case, the taxpayer had taxable income of $505,000 - $57,000, or $448,000.

An exception to the rule when the property is sold within one year after reacquiring the property didn't apply in this case.

(DeBough v. Shulman, 2015-2 U.S.T.C. 50,455, August 28, 2015.)

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Taxpayer employed as a marketing director didn't qualify as a real estate professional.

Kirsten Farris worked as a marketing director for a physical therapy firm during 2010. She claimed a $20,965 loss from her real estate activities for 2010 as a "real estate professional." She and her husband reported $189,737 of income from other activities on their income tax return, so they didn't qualify for the $25,000 allowance.

In order to qualify for real estate professional status, the taxpayer must show he or she worked more than 750 hours on real estate activities and that more than half of his or her working hours were devoted to real estate.

Although she provided a noncontemporaneous log showing her real estate activity, she didn't provide a record accepted by the court for her activity as a marketing director. She didn't satisfy the requirement that more than half of her working hours were devoted to real estate. Therefore, she didn't qualify as a real estate investor and the real estate losses were disallowed as a current deduction under the passive activity loss rules.

(Farris, T.C. Summary Opinion 2015-53, September 8, 2015.)

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Taxpayer employed as a teacher didn't qualify as a real estate professional.

In a similar case, Richard Escalante worked as a teacher during 2005, 2006 and 2007. He and his wife claimed losses under real estate professional status of $35,819, $137,157 and $98,905 for each of those years, respectively.

In order to qualify for real estate professional status, the taxpayer must show he or she worked more than 750 hours on real estate activities and that more than half of his or her working hours were devoted to real estate.

Although he provided an activity log that listed the hours that he worked as a teacher and on his real estate activities, the Tax Court determined that the log was incomplete because Richard failed to record his "off-site" teaching hours in his log.

He didn't satisfy the requirement that more than half of his working hours were devoted to real estate. Therefore, he didn't qualify as a real estate investor and the real estate losses were disallowed as a current deduction under the passive activity loss rules.

These cases demonstrate that it's very difficult to establish yourself as a real estate professional when you have other employment. It's safer for a married couple to establish real estate professional status by having one spouse's working time devoted exclusively to real estate.

(Escalante, T.C. Summary Opinion 2015-47, August 10, 2015.)

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Business expenses of a part-time real estate agent disallowed.

Valeray Pouemi was employed full-time during 2007, 2008 and 2009 by Verizon as a service technician.

He also had a real estate license and worked on weekends selling real estate. He only had received one $9,457 commission during the three years.

The Tax Court upheld the IRS in disallowing losses claimed by Valeray on his income tax returns. The Court found he didn't conduct his real estate activity in a businesslike manner. He had no business books or records and no business bank account. He produced no convincing evidence that he developed expertise or devoted meaningful time or effort to his real estate activity.

Since the expenses (many of which weren't substantiated) weren't incurred in connection with conducting a trade or business, they were disallowed.

The moral is to conduct a part-time business in a businesslike way. Keep good business records and a business bank account. Be prepared to explain the details of your business activities by keeping a diary and a vehicle use log.

(Pouemi, T.C. Memo. 2015-161, August 17, 2015.)

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Uniform basis reporting postponed until late February 2016.

In the Surface Transportation Act of 2015, enacted on July 31, 2015, new rules were adopted requiring using the fair market value of property reported on a federal estate tax return when selling or depreciating property.

The IRS has delayed the effective date of this new rule until it issues guidelines on how it should be implemented. It doesn't expect to do so until late February 2016.

(Notice 2015-57.)

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Property tax appeals filing deadline is coming.

The deadline for filing for a California property tax appeal in Alameda, Inyo, Kings, Orange, Placer, San Francisco, San Luis Obispo, Santa Clara, Sierra and Ventura counties is September 15, 2015. The deadline for other counties is November 30, 2015.

See http://www.boe.ca.gov/proptaxes/pdf/filingperiods.pdf.

For a video about filing appeals, see http://www.boe.ca.gov/info/AssessmentVideo/Index.html.

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California conformity bills await the governor's approval.

California's legislature has sent two major bills to Governor Brown for his approval.

AB 99 (Perea) would extend California's partial conformity to the exclusion of cancellation of indebtedness income for 2014 only. Many taxpayers have extended the due date for filing their 2014 California income tax returns, hoping this relief would be passed.

AB 154 (Ting) will update the conformity date of California's income tax laws to January 1, 2015, for tax years beginning on or after January 1, 2015. There are still exceptions to the rules. For example, bonus depreciation, the Section 179 expense election, and real estate professional status will continue to be different for federal and California income tax reporting. This legislation will make preparing California income tax returns much easier.

(Spidell's Flash Email: "Two big conformity bills await Governor's signature", September 2, 2015.)

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Franchise Tax Board is auditing travel and entertainment deductions.

The Franchise Tax Board is planning to mail 10,000 to 50,000 correspondence letters to taxpayers who claimed tax deductions for travel and entertainment expenses on Schedule A for the 2011 and 2012 tax years.

The letter will request information about the taxpayer's employment, the employer's policy for expense reimbursement and details relating to the expenses claimed, including a transportation log for business mileage.

(Spidell's California Taxletter, "FTB sending 10,000 to 50,000 travel and entertainment audit notices", September 1, 2015.)

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Does your group need a speaker?

We are seeking opportunities to speak before groups. Topics include recent tax developments, tax issues relating to real estate, how estate planning has changed recently, tax issues relating to alternative investments using retirement accounts, and marketing topics such as "How I created a public access television show broadcast on eleven Bay Area stations." To make arrangements, call Michael Gray at 408-918-3161.

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Please share your good experiences with Michael Gray, CPA.

As you know, more and more people are going to the internet to find information about service providers. We hope you will share some good words about experiences that you have had with our firm<. Some of the sites where you can share your experiences include yelp.com, siliconvalley.citysearch.com, and Google+.

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Financial Insider Weekly broadcast schedule for September and October.

Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 9:30 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 September and October:

September 11, 2015, Robert E. Temmerman, Jr., attorney at law, Temmerman, Cilley & Kohlmann, LLP, "I'm an executor. Now what?"
September 18, 2015, Robert E. Temmerman, Jr., attorney at law, Temmerman, Cilley & Kohlmann, LLP, "I'm a trustee. Now what?"
September 25, 2015, Peggy Martin, ChFC, CLU, The Family Wealth Consulting Group, "Legacy planning"
October 2, 2015, William D. Mahan, attorney at law, of counsel to Gates, Eisenhart, Dawson, "Why you need a will"
October 9, 2015, William D. Mahan, attorney at law, of counsel to Gates, Eisenhart, Dawson, "Tax considerations of title"
October 16 and 23, 2015, Paul Duren, Bridge Bank, "Small business financing"
October 30, 2015, Professor Patricia Cain, Santa Clara University School of Law, "Tax concerns of same-sex couples and unmarried couples"

Financial Insider Weekly is also broadcast as follows:

  • Sunday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • Sunday at 1 p.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola
  • Monday at 7:00 p.m. Pacific Time on cable channel 19 in Morgan Hill and broadcast on the internet at the same time as streaming video at www.mhat.tv
  • Monday at 6:30 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
  • Monday at 7:30 p.m. on Comcast channel 15 in Saratoga
  • Monday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • Tuesday at 10:30 a.m. on Comcast channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola
  • Tuesday at 2:30 a.m. and 12:30 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
  • Tuesday at 7:00 p.m. Pacific Time on cable channel 19 in Morgan Hill
  • Broadcast on the internet at the same time as streaming video at www.mhat.tv
  • Wednesday at 8:00 p.m. on Comcast channel 28 in Hayward, Alameda and Fremont and on AT&T U-Verse Channel 99, Hayward public access TV 28 in California
  • Thursday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • Friday at 1:30 p.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • Friday at 3:30 p.m. on KCAT, Comcast channel 15 in Los Gatos
  • Friday at 4:00 p.m. on KMTV cable channel 15 in Cupertino, Los Altos and Mountain View
  • Friday at 6:00 p.m. on Comcast and Astound channel 29 in San Francisco. Online streaming video at www.bavc.org, "public access TV"
  • Friday at 8:00 p.m. on Comcast channel 28 in Hayward, Alameda and Fremont and on AT&T U-Verse Channel 99, Hayward public access TV 28 in California
  • Saturday at 9:00 a.m. and 6:00 p.m. on Midpeninsula Media Center, Comcast Channel 28 in Palo Alto, East Palo Alto, Stanford, Menlo Park & Atherton
  • Saturday at 10:00 a.m. in San Mateo County on PenTV, Comcast Channel 26 and Astound Channel 27
  • Saturday at 1:00 p.m. on Comcast channel 26 and AT&T U-verse channel 99 in Marin County

Past episodes of Financial Insider Weekly are posted on YouTube. One way to watch them is to go to our web site, www.financialinsiderweekly.com, and click on "Past Episodes."

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, 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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If you have employee stock options, have you subscribed to Michael Gray, CPA's Option Alert at no charge or obligation?

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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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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If you would like to subscribe to our newsletter, fill out our form at http://www.realestatetaxletter.com, or email us at dgsiemer@taxtrimmers.com with "subscribe" as the subject. Be sure to include your name and email address.

We do work hard at producing this newsletter, and intend for it to provide meaningful and helpful information. If you have any comments or suggestions, email us at dgsiemer@taxtrimmers.com.

If, for any reason, you would prefer not to receive our newsletter, you can "unsubscribe" using the link below, or email us at dgsiemer@taxtrimmers.com with "unsubscribe" as the subject.

Michael Gray, CPA
2190 Stokes St., Suite 102
San Jose, CA 95128
408-918-3162

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The March 2015 issue of Michael Gray, CPA's Real Estate Taxletter, focusing on tax issues for the homeowner and real estate investor, by certified public accountants in California.
Michael Gray, CPA
2190 Stokes St. Ste. 102
San Jose, CA 95128
(408) 918-3162
FAX: (408) 998-2766