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Michael Gray, CPA's

Real Estate Tax Letter

May 6, 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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Do you need help with extended income tax returns?

Unlike many commercial tax return preparers, we are here throughout the year. Why not finish those extended income tax returns now, and sleep better for the rest of the year? To make an appointment, please call Dawn Siemer on Monday, Wednesday or Friday at 408-918-3162.

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Is there an item you have a question about the income tax returns that you already filed?

To schedule a complimentary half-hour consultation with Michael Gray, CPA or Thi Nguyen, CPA about your question, please call Dawn Siemer on Monday, Wednesday or Friday at 408-918-3162.

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Time to revisit your home mortgage?

Although itís harder to qualify for refinancing, mortgage interest rates have been very low recently, so many people are refinancing. Through our strategic partner, Wymac Capital, Inc., we specialize in no-points, no-fees refinancing, so some clients are immediately applying to refinance again at closing. Some lenders are allowing immediate refinancing without a penalty. Some mortgages feature interest-only payments for a period of years. For more details, call Michael Gray at 408-918-3161.

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Related party exchange fails.

Charles Jones had a problem. One of his family businesses, Ocmulgee Fields, Inc. sold a property with the intention of having the transaction be a tax-deferred exchange. The potential gain from the transaction was $6,122,736. After searching diligently for a replacement property, none could be found.

Through their entities and individually, Charles Jones and his sons were the largest owners of commercial property in the middle of Georgia.

With the advice of his accountant and lawyers, the decision was made to close the exchange with property held by another family business, Treaty Fields, LLC. Treaty Fields reported a gain of $4,185,999 for its sale of the property to the intermediary for the exchange.

Ocmulgee Fields, Inc. reported the exchange on its 2004 income tax return and disclosed that the exchange was with a related party.

The Tax Court upheld the IRS in disallowing the exchange. Under Internal Revenue Code Section 1031(f), nonrecognition of gain is disallowed for exchanges between related properties when one of the properties is sold within two years of the exchange, unless the IRS is satisfied that neither the exchange nor the disposition had as one of its principal purposes the avoidance of federal income tax.

Since the family businesses would have avoided tax on $1,936,737 of gain ($6,122,736 - $4,185,999) had the exchange been successful, the IRS and the Tax Court found that one of the principal purposes of the exchange was the avoidance of federal income tax.

The Tax Court did not uphold an accuracy-related penalty imposed by the IRS. The accuracy-related penalty is not imposed to any portion of an underpayment for which it is shown there was reasonable cause and that the taxpayer acted in good faith. The Tax Court said that the tax law was not clear on this issue and the taxpayer had relied on competent professional advice.

(Ocmulgee Fields, Inc. v. Commissioner, 132 T.C. No. 6, March 31, 2009.)

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First-Time Homebuyer Credit for 2009 purchase may be claimed on 2008 income tax return.

The IRS has announced that taxpayers have the option of claiming the enhanced $8,000 first-time homebuyer credit for a 2009 purchase on either their 2008 income tax return or their 2009 income tax return. The credit was extended to expire on November 30, 2009, increased from $7,500 to $8,000 ($4,000 for married, filing separately) and the "interest-free loan" requirement of a repayment over 15 years was generally eliminated for purchases from January 1, 2009 to November 30, 2009. AGI phaseouts still apply.

At the same time, the IRS released revised Form 5405, First-Time Homebuyer Credit.

For more information about the First-Time Homebuyer Credit, read our article, "First-Time Homebuyer Credit - Home Purchase Help For Low To Moderate Income Taxpayers" at www.realestateinvestingtax.com/first.shtml.

(IR-2009-14.)

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District Court approves IRS levy on residence.

A federal district court approved a levy for unpaid taxes by the IRS on a taxpayerís residence. The taxpayer was working hard to pay off $250,000 of unpaid taxes, penalties and interest, but unable to settle the debt. The taxpayer didnít have any other significant assets to apply to the debt.

The levy protects the IRSís ability to collect the tax should the statute of limitations for collection otherwise expire. The IRS generally will not foreclose on a levy if the taxpayer makes a good-faith effort to pay the debt.

(R.A. Peterson, DC Calif., 2009-1 USTC ∂ 50,238)

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IRS explains extended net operating loss deduction.

A provision of the American Recovery and Reinvestment Act of 2009 allows a longer net operating loss carryback for certain small business losses, extended from two years to up to five years. An election was available to use the election for a tax year ending in 2009 when the tax return was already filed and the NOL carryback period was previously waived, but the election had to be made by April 17, 2009.

The IRS has issued more details about the election, including updated "quick refund" forms 1045 and 1139 and instructions, and an Publication 536.

For more information, see the IRS web site, www.irs.gov, or your tax advisor. (Rev. Proc. 2009-19.)

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Home mortgage acquisition indebtedness limited to $1 million total for one residence.

The IRS Chief Counsel says the mortgage interest deduction for a personal residence is limited to interest on a total of $1 million of mortgage debt on the residence. For example, if two unmarried taxpayers purchase a $3 million residence and each has a $1 million mortgage for their undivided interest, the taxpayers will not be entitled to deductions for mortgage interest on $1 million of mortgage debt each, but the two taxpayers will be entitled to deductions on $1 million total of mortgage debt. (CCA 200911007.)

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Watch for disguised solicitations for services.

Companies are sending official-looking letters that are actually solicitations for services. Two services for which the letters are being sent are property tax appeals (of assessed value) and preparation of Statements of Information for Limited Liability Companies. You can prepare these forms yourself. There is no fee from the county assessor for filing a property tax appeal. The California Secretary of State fee for filing a Statement of Information is $20.

We can assist with these forms if you need help or have questions.

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California New Home Credit.

California has adopted a new home credit, effective for California taxpayers that purchase a qualified principal residence after February 28, 2009 and before March 1, 2010. Only a limited amount of credits will be granted on a first-come, first-served basis.

The credit is the lesser of 5% of the purchase price or $10,000. The credit is applied in equal parts over three successive tax years, beginning with the year in which the residence is purchased. The credit is nonrefundable, and any unused credit will be lost. The credit also may not reduce regular tax below the tentative minimum tax, and may not reduce the alternative minimum tax.

Unlike the federal First-Time Homebuyer Credit, there are no income or previous ownership restrictions for the California credit. Only one credit is allowed for only one qualified purchase per taxpayer. The home must be new or previously unoccupied.

If the taxpayer does not occupy the residence as his or her principal residence for at least two years immediately following the purchase, any unused credit is cancelled and the taxpayer must repay any credit for which a tax benefit was received.

A qualified residence may be:

  • A single-family residence
  • A condominium
  • A unit in a cooperative project
  • A houseboat
  • A manufactured home or a mobile home

If two or more taxpayers buy the home, the credit is divided according to their percentage of ownership. Spouses who file separate returns each get one-half of the credit.

The total credits allowed in California is limited to $100 million. The FTB will have information on its website about the unallocated limit remaining. The seller must fax Form FTB 3528A, Application for New Home Credit, to the FTB within seven days of the sale of the qualified principal residence. The fax number is 916-845-9754. Both the buyer and the seller must sign the form. The FTB will mail confirmation of the amount of the credit to the buyer within about 30 days after receiving the form.

The taxpayer will claim the credit using Form FTB 3528A.

The Franchise Tax Board will publish FTB Publication 3528, explaining the credit, in December 2009. It will be at the Franchise Tax Boardís web site, www.ftb.ca.gov.

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

Question

Mr. and Mrs. X bought a rental property in 1978, and have used one of four apartments as a summer residence. They will make it their permanent residence for two years prior to selling it. Can they continue to rent the other units while claiming it as their principal residence? It has been fully depreciated since 2003.

Answer

They can rent the units while living in one. The exclusion for sale of a principal residence wonít apply to the rented units. The gain will have to be prorated for the personal residence versus the rental units. (Treasury Regulations Section 1.1212-1(e).)

Also, the tax law was recently changed so that periods of use other than as a principal residence after 2008 will reduce the exclusion, and that the amount of gain up to depreciation taken for periods after May 6, 1997 isnít eligible for the exclusion.


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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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Do you know about our other newsletters?

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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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 May 2009 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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