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Michael Gray, CPA's

Real Estate Tax Letter

January 14, 2009

© 2009 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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Happy New Year!

2009 is here, at last! We know this will be a year of challenges, so roll up your sleeves!

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Tax preparation materials are on the way.

We are mailing instructions to those of you who use the online Tax Notebook this week. If you use a paper organizer, you should have already received it. If we prepared your tax returns last year and you haven’t received instructions by January 15 or you would otherwise like to receive instructions, call Dawn Siemer weekday afternoons at 408-918-3162.

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Make your tax preparation appointment now.

If you would like to schedule an appointment for a tax preparation interview, also please call Dawn Siemer weekday afternoons at 408-918-3162.

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Time to revisit your home loan?

Home loan interest rates have been falling. For many homeowners, there is a refinancing opportunity now. Remember that we provide home loan brokerage services through our strategic partner, Wymac Capital, Inc. To explore whether we can help get financing for your new home, reduce the interest rate on your mortgage, or convert an adjustable rate mortgage to a fixed-rate mortgage, call Michael Gray at 408-918-3161.

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Final 2008 estimated tax payment is due January 15.

Remember the final estimated tax payment for calendar-year individuals, estates and trusts is due January 15. You might want to check with your tax advisor about reducing the payment if you had much lower capital gains in 2008 than in 2007, you are entitled to the increased federal refundable minimum tax credit or your facts have otherwise changed. (Sorry for the late reminder.)

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W-2s, 1099s and DE 542 reminder.

Remember that most 2008 annual information returns, such as W-2s and 1099s, should be issued to payees by February 2 and sent to the tax authorities by March 2.

Also remember that Form 542, Report of Independent Contractors, should also be submitted for ongoing independent contractor arrangements by January 20. The due date is the earlier 20 days after the date $600 or more of payments have been made to the independent contractor or the date a contract has been entered for $600 or more of services during a calendar year.

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New offer for Real Estate Tax Handbook.

The introductory half-price offer for The Real Estate Tax Handbook, 2008 Edition has expired. As a reader of this newsletter, you are now only eligible for a 25% discount. For details, go to realestateinvestingtax.com/realestatetaxhandbookoffer.shtml.

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Relief extended for "bundled" fiduciary fees.

Fees paid by estates and trusts for investment advice are generally subject to reduction by 2% of adjusted gross income. Some fiduciaries, including banks and investment companies, include fees for investment advice in their fees for acting as trustee or executor. The IRS previously waived segregating these fees for 2007. Now they have extended this waiver for tax years beginning before January 1, 2009. (Notice 2008-116.)

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REITs get relief from making cash payments.

The IRS is permitting real estate investment trusts (REITs) to treat stock dividends as cash distributions in order to meet the requirement to distribute 90% of earnings to shareholders. The election is available for dividends declared on or after January 1, 2008 and on or before December 31, 2009. (Rev. Proc. 2008-68.)

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More federal tax legislation passes.

Congress has passed the Worker, Retiree and Employer Recovery Act of 2008, H.R. 7327.

The legislation suspends required minimum distributions from IRAs and qualified retirement plans for 2009, but not 2008.

Effective January 1, 2008, direct rollovers from tax-qualified retirement plans, tax-sheltered annuities and Section 457 plans to a Roth account will be permitted. Previously, rollovers were only permitted from IRAs and Roth accounts.

Another provision requires qualified retirement plans to permit a direct trustee-to-trustee transfer by a non-spouse beneficiary to an IRA account. The IRS previously said this feature was optional.

The Act also includes funding relief for employers that have defined benefit plans.

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California withholding for real estate sales – changes for 2009.

The Franchise Tax Board has issued updated forms and instructions for withholding of California income taxes when real estate located in California is sold during 2009.

The default withholding rate is 3 1/3% of the total sales price. Alternatively, the seller can compute the estimated taxable income from the sale and have income tax withheld at the following rates:

  • 9.3% for individuals and non-California partnerships
  • 8.84% for corporations
  • 10.84% for banks and financial corporations
  • 10.8% for S corporations
  • 12.8% for financial S corporations

A major change is that non-resident partnerships, non-resident S corporations and non-resident estates and trusts are now subject to withholding.

After the initial sale of the property in an installment sale, the buyer is responsible for withholding California tax on payments on the installment sale note. The buyer sends Form 593-I to the Franchise Tax Board and a copy of the note with the initial payment.

Deposits should be paid to the Franchise Tax Board within 20 days after withholding.

Here is a list of sellers exempt from withholding:

  • Property qualifies as the principal residence of the seller.
  • Property was last used as a principal residence by the seller.
  • The sale will result in a loss or zero gain for California tax purposes (certification required).
  • Transaction will qualify as a like-kind exchange, except for boot.
  • Transaction will qualify as an involuntary conversion.
  • Transaction is a tax-free transfer to a corporation under Internal Revenue Code Section 351 or to a partnership under Internal Revenue Code Section 721.
  • Seller is a corporation with a permanent place of business in California.
  • Seller is a California partnership.
  • Seller is an LLC classified as a California partnership for income tax purposes and is not a single-member LLC that is disregarded for federal and California income tax purposes.
  • Seller is a tax-exempt entity.
  • Seller is an insurance company, individual retirement account (IRA), qualified pension plan or charitable remainder trust.

For details, see FTB Publication 1016, Real Estate Withholding Guidelines, and the Forms and Instructions, including Form 593-C and Form 593-E. You can find them at the Franchise Tax Board web site, www.ftb.ca.gov.

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Questions and Answers

Question

When you wrote about short sales and mortgage forgiveness and the tax impact when the taxpayer continues to live in the residence, you stated you only had authority in the IRS publication (which is no authority). According to the statute, basis reduction only applies to the personal residence of the taxpayer and he or she no longer has one in a foreclosure or short sale.

Would you please clarify this matter?

Answer

In my article, I pointed out that, according to the IRS publication, there is no basis adjustment when the property is sold coincidentally with the debt cancellation, such as in a short sale or a foreclosure.

The authority for this position is Internal Revenue Code Section 1017.

That section applies if an amount is excluded from gross income under the cancellation of indebtedness section – Section 108(a). The exclusion for residential mortgage interest is under Section 108(a)(1)(E).

The basis reduction applies to the basis of "any property held by the taxpayer at the beginning of the taxable year following the taxable year in which the discharge occurs". (Section 1017(a).)

Since the taxpayer will no longer own the residence at the beginning of the next taxable year after the discharge because it was sold or foreclosed at the time of the discharge, the basis adjustment doesn’t apply.


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

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

Many other questions relate to short sales and foreclosures. See our article on that subject at www.realestateinvestingtax.com/shortsale.shtml

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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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Michael Gray, CPA
2190 Stokes St., Suite 102
San Jose, California 95128-4512
(408) 918-3162
Fax (408) 998-2766
email: mgray@taxtrimmers.com
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