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Table of Contents

• Not much time left for year-end tax planning!
• Decedent retained economic benefits of gifted property.
• Real estate deductions disallowed because of lack of profit motive.
• Questions and Answers
  • Principal residence answers.
  • Must I report capital gains on a real estate sale in a foreign country?
  • How can my parents avoid paying taxes when they sell their house?
• Do you know about our other newsletters?
• Subscribe/Remove yourself from this newsletter.

Not much time left for year-end planning – make your reservation now!

One might think that with two months left, there is plenty of time to get ready for the end of the year, but think again. I’ll be gone from November 2 until November 16. Then comes Thanksgiving weekend on November 23 and 24. Thi and I will be at a Dan Kennedy program on December 1 and 2 and tax update classes on December 18 and 19, and Christmas is Monday, December 25.

That leaves a very limited calendar for tax consultations. If you need a tax consultation appointment, call Dawn Siemer at 408-918-3166 to reserve your time now (before she disappears starting Thanksgiving weekend)!

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Decedent retained economic benefits of gifted property – included in estate.

Margot Stewart owned real estate on 61st Street in New York city. She and her son, Brandon, lived on the first two floors of the building and she leased the remaining three floors to Financial Solutions, Ltd. for $9,000 per month.

On May 9, 2000, Margot made a deed transferring 49% of the property to Brandon.

Margot passed away on November 27, 2000.

Margot’s executors tried to exclude the real estate that transferred to Brandon from Margot’s taxable estate.

The Tax Court accepted that the transfer to Brandon was complete, but still required inclusion of the property in her estate. Margot continued to live in the building after the gift, and she received all of the rental income.

When a decedent has made a gift but retained the economic benefits of the gifted property, it is included in the decedent’s taxable estate.

(Estate of Stewart v. Commissioner, T.C. Memo 2006-225 (10/24/2006).)

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Real estate deductions disallowed because of lack of profit motive.

Anke Lunsmann-Nolting worked as an assistant dean at Columbia University Medical Center.

She helped establish a research center in the remote small town, Lubec, Maine and bought a Victorian home as a second residence.

Anke also bought some small cottages, planning to rent them out.

However, the condition of the units deteriorated and there was little rental activity.

Anke never advertised the cottages for rent in a newspaper or on the internet. She just posted some cards on the units, but expressed a preference to rent them to people from out of town.

The IRS disallowed Anke’s losses from the properties. They said she didn’t have a profit motive. The Tax Court agreed.

The Tax Court allowed deductions for property taxes, but disallowed depreciation deductions and repair and maintenance expenses.

There is a lesson here. Everyone expects their real estate losses to automatically be allowed. There has to be at least some effort at making the properties profit producing. Also, this town had no industry, so there was little likelihood of appreciation in value for these properties.

When the facts are bad, real estate losses can be disallowed.

(Lunsmann-Nolting v. Commissioner, T.C. Summary Opinion 2006-175 (10/24/2006).)

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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

Is it required to report capital gains on the sale of real estate in a foreign country, even if the tax obligations for the foreign country are fulfilled? If yes, is it possible to get a tax credit for the foreign tax paid?

Answer

U.S. citizens and residents of the United States are taxable on their worldwide income. Sales of properties located outside the U.S. by a U.S. citizen or resident should be reported on the U.S. income tax return. There may be a credit available for tax paid to the country where the property is located. You should probably get help from a professional tax return preparer on this matter.

Question

I am in the process of buying my parents’ house. They have a tax basis of $5,000 and the house is currently valued at $500,000. What is the best way to buy the home and avoid a tax burden for my parents?

Answer

Assuming this is your parents’ principal residence and has been their principal residence for two of the last five years, your parents should qualify for a $500,000 exclusion. See our report, "Could your residence be the ultimate tax shelter?" I suggest that you get help from an attorney or title company with the paperwork.

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

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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.