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Michael Gray, CPA's

Real Estate Tax Letter

September 10, 2008

© 2008 by Michael C. Gray
ISSN 1930-0387

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

Table of Contents

Third quarter estimated tax payments are due September 15.

Third quarter estimated tax payments for calendar year taxpayers, including most individuals, are due September 15. If your withholding won’t be enough to avoid penalties for underpayment of estimated tax, you should be making estimated tax payments based on last year’s tax liability or an annualized computation of this year’s tax. Call Dawn Siemer weekday afternoons at 408-918-3162 to make an appointment if you need help.

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Do you need help preparing extended income tax returns?

Time marches on! The extended due date for 2007 calendar year corporate income tax returns is September 15, 2008. The extended due date for 2007 calendar year individual, partnership, estate and trust income tax returns is October 15, 2008.

If your 2007 income tax returns aren’t done yet and you are seeking help from a tax return preparer, call Dawn Siemer on a weekday afternoon for an appointment at 408-918-3162.

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Tax planning and the Presidential election.

Barack Obama has indicated he will seek tax increases for high-income taxpayers if he is elected as President of the United States. You might want to accelerate income to 2008, which may be subject to lower income tax rates. Remember the wash sale rules do not apply to capital gains, so you can sell assets and buy similar ones back to pay taxes for long-term capital gains at the 15% tax rate for 2008. (Do not do this for disqualifying ISO dispositions without consulting a tax advisor.) Consider electing to not use the installment sale method for 2008 sales.

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A ray of hope for the housing market.

The federal government has taken over Fannie Mae and Freddie Mac. As part of the rescue package, the federal government will inject some needed funds into the mortgage market. The mortgage market has already responded with decreases in interest rates. For now, it will still be harder to qualify for a mortgage, with more “hoops” and documentation required. This may be an important step for recovery of the housing market, unfortunately at the expense of U.S. taxpayers.

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Court says California can keep apportioned part of LLC fee.

The California Court of Appeals, First District has ruled that California’s LLC fee, before a recent change, was an unapportioned tax that violated the Commerce Clause of the U.S. Constitution. However, the court said the proper remedy to be applied is for the state to refund the portion of the fee paid by the taxpayer exceeding the amount that would have been required if the fee was fairly apportioned. The attorneys for the taxpayer have indicated they will appeal the decision. (Ventas Finance I, LLC v. California Franchise Tax Board, Cal. Ct. App., 1st Dist., 8/11/08.))

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California mortgage debt forgiveness conformity status.

The California legislature has passed legislation, SB 1055 (Machado), to conform to federal relief in the Mortgage Forgiveness Debt Relief Act of 2007. The legislation still needs to be approved by Governor Schwartzenegger.

The California proposal is different from the federal law in several respects:

  • The California maximum qualified principal residence indebtedness eligible for the exclusion would be limited to $800,000 or $400,000 for married persons filing a separate return. The federal limits are $2 million or $1 million for married persons filing a separate return.

  • The California maximum cancellation of debt exclusion is $250,000 or $125,000 for married persons filing a separate return. The federal exclusion is limited to the amount of qualified principal residence indebtedness.

  • California would allow the exclusion for 2007 and 2008. The federal exclusion is also allowed for 2009.

Remember the tax basis of the residence is reduced for the excluded gain.

The California legislation also abates penalties and interest for late payment of tax for a 2007 income tax return relating to the discharge of qualified residence indebtedness.

Remember the exclusion applies to recourse mortgages for a principal residence. The exclusion usually wouldn’t apply to a non-recourse mortgage because a foreclosure or short sale with a non-recourse mortgage includes the mortgage amount in the sale proceeds.

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

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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.

The September 2008 newsletter focusing on tax issues for the homeowner and real estate investor, by certified public accountants in California.

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