Michael Gray, CPA's

Real Estate Tax Letter

December 27, 2007

© 2007 by Michael C. Gray
ISSN 1930-0387

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

Table of Contents

Happy New Year!

Happy New Year! We will be closed on January 1. Michael Gray will be out of the office from December 30 through January 4. Thi Nguyen will be out of the office on December 31 and on January 3 and 4.

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Tax organizer instructions are in the mail.

We have mailed paper organizers or online tax notebook organizer instructions to clients for whom we prepared 2006 income tax returns during 2007, and will soon be sending instructions to clients that we had planning meetings with during 2007. If you haven’t received instructions to assemble information for your income tax returns by January 15 and want us to prepare your income tax returns, call Dawn Siemer weekday afternoons at 408-918-3162.

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Make your tax return preparation appointment now.

Our tax season calendar for tax preparation appointments is also rapidly filling in. If you want to meet with us about preparing your income tax returns, call Dawn Siemer at 408-918-3162 to schedule an appointment.

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Remember estimated tax payment is due January 15.

The final estimated tax payment for 2007 is due January 15, 2008. See your tax advisor to determine if any adjustments are required for exercises of options, sales of securities, etc. during the last four months of 2007.

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A holiday gift from Congress - residential mortgage debt forgiveness tax break passes.

The Congress has passed and President Bush has approved H.R. 3648, the "Mortgage Forgiveness Debt Relief Act of 2007." The legislation is effective for discharges of indebtedness on or after January 1, 2007 and before January 1, 2010.

Under the new law, a discharge of "qualified principal residence indebtedness" is excluded from taxable income. "Qualified principal residence indebtedness" is acquisition indebtedness secured by the principal residence of a taxpayer as defined for the deduction of residential mortgage interest, but the limit is $2,000,000 for the exclusion ($1,000,000 for the mortgage interest deduction) and $1,000,000 for married persons filing a separate return ($500,000 for the mortgage interest deduction). Also, the exclusion only applies to a mortgage secured by the principal residence of the taxpayer.

The exclusion does not apply if the discharge relates to providing services to the lender or any other factor not related to a decline in the value of the residence or the financial condition of the taxpayer/borrower.

The tax basis of the residence (cost used to determine taxable gain or loss on sale) is reduced by any amount of discharge of indebtedness excluded from taxable income, but not below zero.

The new exclusion of income for discharge of acquisition indebtedness for a principal residence takes precedence over the exclusion relating to insolvency, unless the taxpayer elects otherwise.

(Remember the foreclosure of a non-recourse mortgage is not a discharge of indebtedness, but a "sale" of the residence in satisfaction of the mortgage. Therefore, such a foreclosure won’t qualify for the new exclusion, but may qualify for the exclusion of gain for sale of a principal residence. Also, since the balance of acquisition indebtedness is almost always less than the tax basis (cost) of the residence, it would be highly unusual for there to be a gain from a foreclosure.)

The Act also extends the date through which mortgage insurance premiums are deductible as interest from December 31, 2007 to December 31, 2010.

(P.S. California and many other states have not conformed to this change!)

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New forms issued for withholding from sale of California real estate and distributions to non-resident partners.

The California Franchise Tax Board has posted new forms relating to withholding from the sale of California real estate to its web site, www.ftb.ca.gov. The forms are the 593 series, including Form 593-E, the computation of estimated gain or loss on which the "actual" tax may be withheld, instead of the standard 3 1/3% rate.

The new 592 series of forms has been posted for withholding (at a standard 7% rate) of California tax for payments to nonresident independent contractors, distributions to nonresident beneficiaries of California trusts, estate distributions to nonresident beneficiaries of California estates, rent payments to nonresident landlords, distributions to nonresident shareholders of California S corporations, and distributions to nonresident partners/members of California partnerships/LLCs. For 2008, the withholding for payments to nonresidents is required to be deposited quarterly.

The rate for foreign partners and members is the maximum rate applicable (8.84% for corporations and 9.3% for individuals and non-corporated payees).

A nonresident may request a waiver from California tax withholding at least 30 days before the payment is received using Form 588. (A waiver granted by the Franchise Tax Board is good for two years.) Reduced withholding may be requested using Form 589. Entities that are exempt from withholding may claim their exemption using Form 590. If the income being distributed to a domestic partner or shareholder was previously taxed by California and reported by the recipient (partnership or S corporation income), an exemption from withholding may be claimed using Form 590-P.

If you have questions about how these rules apply to you, consult with a tax advisor who keeps up with California tax laws.

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Standard mileage rate for 2008.

The standard business mileage rate for 2008 will be 50.5¢ per mile, increased 2¢ from the 48.5¢ rate for 2007. The standard mileage rate includes a depreciation component of 21¢ per mile for 2008 and 19¢ per mile for 2007.

The standard mileage rate for medical care and for moving expenses has decreased to 19¢ per from for 2008 from 20¢ per mile for 2007. The standard mileage rate for charitable vehicle use is unchanged at 14¢ per mile.

(Revenue Procedure 2007-70, 2007-50 IRB 11/27/2007.)

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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.


If I have commercial real estate included in my trust, and the trust becomes irrevocable and maintained for the benefit of my heirs, does the estate (trust) still receive the stepped-up basis?


If the trust is revocable during your lifetime and becomes irrevocable at your death, it is essentially a substitute for a will and the tax basis of the property should be eligible for the basis adjustment. Please see an advisor relating to your particular situation, because some details of property ownership can affect the results.

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

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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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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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