Subscribe to this newsletter! subscribe unsubscribe

Table of Contents

• Trick! The year is almost over already!
• Last chance for 2005 income tax returns for non-corporate taxpayers.
• Governor Schwarzenegger approves tax and business legislation.
• Losses from real estate investment partnership limited.
• Substantiation requirement failed for charitable contribution of real estate.
• Tax exempt social club doesn't pay tax on land sale.
• Questions and Answers
  • Principal residence answers.
  • If I don't claim depreciation, is the tax basis of the property still reduced?
  • If my Mom sells her house, can she claim my deceased Dad's deduction?
  • Should I add my son's name to my home's title for a better exemption?
• Do you know about our other newsletters?
• Subscribe/Remove yourself from this newsletter.

Trick! The year is almost over already!

Halloween will be here soon, which also means it will soon be the holiday season! The stores are setting up their displays of decorations and gift ideas.

There are only three months left to prepare for the end of the year. What needs to be done for your tax situation? Now is the time to set up your year-end planning appointment. Call Dawn Siemer at 408-918-3166 today.

Return to Table of Contents

Last chance for 2005 income tax returns for non-corporate taxpayers.

The extended due date for calendar year noncorporate taxpayers, including most individuals, partnerships, estates, and trusts is October 15. That is also the extended due date for making deductible employer payments to qualified retirement plans of these entities, including Keoghs, SEPs, defined benefit plans, profit sharing plans, ESOPS and 401(k) plans. The extended due date for 2005 gift tax returns is also October 15. This is a critically important due date, so please be sure your income tax returns are filed on time. In some situations, penalties can even be imposed when there is a tax overpayment. If we can be of service to you in this area, call Dawn Siemer at 408-918-3166 for an appointment.

Return to Table of Contents

Governor Schwarzenegger approves tax and business legislation.

Here are some of the items of 2006 legislation just approved:

• AB2341 changes and simplifies termination procedures for corporations, LLC, LPs and LLPs. The legislation should allow an entity to avoid having to file an income tax return and pay minimum franchise taxes when the entity has stopped doing business and paperwork is being processed in the Secretary of State’s office. The above business entities will have one year from the filing of a timely, final tax return to file dissolution/cancellation paperwork with the Secretary of State. The requirement that corporations and LLCs get a Tax Clearance Certificate before dissolving has been eliminated.



• Effective for 2007, California registered domestic partners will file California income tax returns as married persons. This will be a major item of non-conformity with federal tax law, probably requiring that the income tax returns be processed on two sets of forms. All California registered domestic partners should have their income tax returns prepared by a professional tax return preparer for their 2007 income tax returns. (SB 1827.)



• The governor vetoed AB 1614, which would have required LLCs to apportion income to determine the LLC total income fee. The question of whether California’s current fee structure is constitutional remains to be determined by higher courts of appeal.



• Beginning January 1, 2007, California will allow real estate withholding based on an estimate of the tax due from the gain. The seller will have a choice to withhold tax at the maximum California rate (9.3% for individuals and 8.84% for corporations) on the estimated gain from the sale or 3.33% of the total sales price. (Stand by for new forms to be issued by the Franchise Tax Board.) (AB2962.)

Return to Table of Contents

Losses from real estate investment partnership limited.

Two brothers claimed the losses from a real estate investment partnership should not be disallowed under the passive activity loss rules because they were real estate professionals. In order to qualify, (i) more than one-half of the personal services performed in trades or businesses by the taxpayer for the taxable year must be performed in real property trades or businesses in which the taxpayer materially participates and (ii) the taxpayer must perform more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates.

The court didn’t believe the records provided by the taxpayers as evidence that they met the requirements. The time log records were significantly different from those submitted during the tax examination. Some of the entries were questionable, such as 56 hours to install a new toilet in an apartment and 48-50 hours to wrap coins from laundry machines. Most importantly, both of the brothers had full-time jobs in unrelated occupations – one as an IRS auditor (!) and the other as a professor of radiology and consultant.

The court found against the taxpayers. (Kai and Susanna Lee v. Commissioner, Ulysses and Jane Lee v. Commissioner, T.C. Memo 2006-193 (9/11/2006).)

Return to Table of Contents

Substantiation requirement failed for charitable contribution of real estate.

The charitable contribution deduction was disallowed for donations of real estate to the Delaware Agricultural Lands Preservation Foundation. The taxpayers made a bargain sale of one farm valued at $222,921 and the development rights of a second farm valued at $238,007 to the foundation for $100,000 each. They did not disclose on Form 8283 that the donation was a bargain sale. Acknowledgements of the donations was not signed by a representative of the Foundation on the form 8283 included with the taxpayers’ income tax return, but was included on a subsequently submitted form requested by the IRS. An appraiser didn’t sign either the original or the subsequently filed form 8283, and the appraisals submitted by the taxpayers did not indicate they were prepared for income tax purposes. New appraisals were submitted for the 2001 gifts in 2006.

The Tax Court held that the taxpayers didn’t timely meet the substantiation requirements, and so weren’t entitled to a charitable contribution deduction. The original appraisals were prepared more than 60 days before the donation, didn’t state they were prepared for income tax purposes, and didn’t value the properties on the date of contribution. The appraiser was retained by the charity instead of the taxpayers. The final appraisals were prepared more than three years after the due date of the income tax return.

The moral of the story is there are strict requirements for non-cash donations exceeding $5,000, including getting a qualified appraisal, that must be met or the deduction will be denied. Pay attention to the details.

(Ney v. Commissioner, T.C. Summary 2006-154 (9/19/2006).)

Return to Table of Contents

Tax exempt social club doesn’t pay tax on land sale.

A tax-exempt social club that offered activities to its members including equestrian events, shooting sports, golfing, swimming, tennis and a club house proposed to sell a parcel of its real estate and use the proceeds to upgrade the remaining facilities. The IRS ruled that the land sale met an exception for an incidental sale of property, so it would not be subject to the unrelated business tax and the sale would not adversely affect the club’s exempt status. (Letter Ruling 200638026.)

Return to Table of Contents

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?" (realestateinvestingtax.com/residence.shtml) where you should be able to find the answers to most of these questions.

Question

If I do not claim depreciation for my rental property, is the tax basis of the property still reduced for the depreciation I should have claimed?

Answer

Yes. The tax basis of depreciable property is reduced by accumulated depreciation allowed or allowable. There are some new procedures available to "catch up" unclaimed depreciation, including for the year of sale. See a professional tax return preparer for help.

Question

My dad died two years ago and now the house is in a living trust under my mom’s name. If she sells the house, does she get the $500,000 exemption for sale of a principal residence, or $250,000?

Answer

$250,000. The tax basis of the property should be eligible for some tax basis adjustments that will reduce or eliminate any taxable capital gain. See a professional tax return advisor for help.

Question

I am divorced and I plan on selling my home during 2007. I am the sole owner of the home. I am considering adding my 17 (almost 18) year-old son on the title to qualify for a $500,000 exemption instead of $250,000. We have both lived in the home 24 of the last 60 months.

Comments?

Answer

Your son wouldn’t qualify to claim the exemption for a 2007 sale. In order to qualify for the exemption, the taxpayer must have owned and used the home as his or her principal residence for two years or more during the five-year period ending on the date of the sale or exchange. He wouldn’t meet the ownership requirement.

I question the wisdom of giving $250,000 or more to an 18-year old.

The transfer would be a taxable gift, which should be reported on a gift tax return and would use some of your lifetime exemption equivalent for taxable gifts.

If you just changed the title but kept the proceeds of the sale, the transfer would be disregarded as fraudulent, the exemption would be limited to $250,000 and you would be subject to some nasty penalties.

I don’t think this is a good idea and wouldn’t consider of doing it myself.

---

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

Return to Table of Contents

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.

Return to Table of Contents

Subscribe to the Real Estate Tax Letter

Did you find this newsletter helpful? If so, subscribe now!

Subscribe to this newsletter! subscribe unsubscribe

Return to Table of Contents

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.