Michael Gray, CPA's

Real Estate Tax Letter

May 27, 2008

© 2008 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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Second 2008 estimated tax payment is due June 16.

Remember the second estimated tax payments for calendar year taxpayers are due on June 16. If you have a change in your situation or your estimated taxes are based on your 2008 income and deductions, you should contact your tax advisor now.

If we can be of service with this, call Mike Gray at 408-918-3161.

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Now is a good time to finish those extended 2007 income tax returns.

If you filed for an extension of time to file your 2007 individual income tax returns, the extended due date is October 15, 2008. It’s easy to put this project "on the back burner" and wait until the due date to finish the returns.

There is a possibility that waiting until the extended due date could result in missing the deadline and filing late income tax returns. Sometimes an election is made on the return that must be made on a timely-filed return.

Also, penalties and interest may be charged for any unpaid tax finally determined.

Finally, your friendly neighborhood tax return preparer would appreciate having work for their team members to do and to avoid the stress of having a last-minute "crunch" of tax returns during October, requiring working overtime.

So do yourself and your tax return preparer a favor and finish your 2007 income tax returns during June this year.

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Michael Gray quoted in San Francisco Chronicle article about erroneous Franchise Tax Board notices.

Kathleen Pender of the San Francisco Chronicle wrote an article in the May 18, 2008 edition, Business section about erroneous billings being issued by the Franchise Tax Board. Since payments are being mailed separately for e-filed California income tax returns, the Franchise Tax Board has issued notices for penalties plus interest for payments received after April 15, even though they were mailed on time.

Here is a link to the article: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/05/18/BU4U10NQPR.DTL&hw=franchise+tax+board&sn=001&sc=1000.

My big quote was, "People can’t believe everything they get from the Franchise Tax Board as gospel."

If you receive a notice for an amount due from the tax authorities, be sure to review it with your tax advisor before paying it.

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Tax Court evaluates valuations for gifts of real estate limited partnership interests.

The Tax Court performed a critical analysis of valuation specialists for a taxpayer and the IRS in Astleford v. Commissioner. Jane Astleford transferred properties (some held in a general partnership) accumulated during her husband’s lifetime to a limited partnership and made gifts of 30% limited partnership interests to each of her three children, retaining 10% for herself.

There were disputes about the value of some of the real estate (in favor of IRS), whether discounts should be allowed for a general partnership interest transferred to the limited partnership (in favor of the taxpayer), and the methodology of determining valuation discounts for lack of control and lack of marketability (in favor of the IRS’s specialist, with adjustments in favor of the taxpayer.)

Here are the taxable gift value results. 1996 gift: taxpayer, $277,441; IRS $626,898; Tax Court $517,575. 1997 gift: taxpayer, $3,954,506; IRS $10,937,268; Tax Court $6,565,215.

(Astlefor v. Commissioner, T.C. Memo. 2008-128, May 5, 2008.)

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IRS finds related party exchanges qualify for tax-deferred treatment.

In two letter rulings, the IRS ruled that when an exchange with unrelated parties was followed with an exchange of one of the replacement properties with a related party and the properties were not sold shortly after the exchanges, the related party exchanges qualified as tax-deferred exchanges under Internal Revenue Code Section 1031 and did not violate Section 1031(f)(2). According to Section 1031(f)(2), an exchange with a related party will not qualify for tax-deferred treatment if one of the principal purposes was the avoidance of federal income tax. (Letter Rulings 200820017 and 200820025, both issued February 7, 2008.)

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You must request LLC fee refunds, even if a protective claim was filed.

According to Spidell’s California Taxletter, as a result of losing Northwest Energetic Services, LLC, the Franchise Tax Board is issuing refund payments to LLCs that conducted no business in California.

The procedure for requesting a refund is outlined in the May 1, 2008 issue of Spidell’s California Taxletter.

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California property tax taxable value notices mailed.

Counties in California have mailed their notices of taxable value indicating the value to be used for computing property taxes. The Santa Clara County assessor (for my residence) requests to be contacted by June 15, 2008 if the value looks too high and to request a Proposition 8 (decline in value) review. The county can then decide if the value should be changed before July 1, 2008 and issue a corrected notice.

Applications for reduced assessment must be filed between July 2 and September 15, 2008 with the Clerk of the Board, County Government Center.

If you own California real estate and your notice of taxable value looks too high, look into the details for making an appeal, because the time is very short for this process.

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Is California tax relief for mortgage forgiveness important to you?

Spidell Publishing reminded subscribers of its email newsletter that California proposed legislation to conform to the federal exclusion of certain mortgage debt relief from income (Mortgage Forgiveness Debt Relief Act of 2007) is sitting in the Assembly Revenue and Taxation Committee with no sense of urgency. These proposals would be effective for 2007, so tax return preparers and their affected clients should be concerned.

The proposals are AB 1918 (Niello) and SB 1055 (Machado). Please call Assemblyman Calderon, who is the chair of the Committee, to support both bills. SB 1055 is preferable, because it has already passed the Senate. His telephone number is 916-319-2058 and his fax number is 916-319-2158. His web site is http://democrats.assembly.ca.gov/members/a58/.

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

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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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