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Michael Gray, CPA's

Real Estate Tax Letter

June 8, 2009

© 2009 by Michael C. Gray
ISSN 1930-0387

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

Table of Contents

Second 2008 estimated tax payment is due June 15.

The second estimated tax payments for calendar year taxpayers are due on June 15. If you have a change in your situation or your estimated taxes are based on your 2009 income and deductions, you should contact your tax advisor now.

California noncorporate taxpayers who expect their 2009 adjusted gross income to be $1 million or greater ($500,000 or greater for married persons or registered domestic partners filing a separate return) can no longer base their estimated tax payments on last year’s income tax returns. Quarterly estimated tax reviews are critical to avoid penalties for underpayment of estimated tax for these taxpayers.

California’s individual income tax rates are increased 0.25% across the board for 2009.

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

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Calendar year LLC fee payment due June 15.

California has a new requirement for an advance payment of the estimated fee for a California LLC. The requirement applies for taxable years beginning on or after January 1, 2009.

The fee only applies to LLCs subject to California reporting with expected gross receipts of at least $250,000, so only those LLCs are subject to the advance payment requirement.

For calendar year LLCs, the 2009 payment is due on June 15, 2009. The payment should be made with Form FTB 3536. The form is available at the Franchise Tax Board web site, www.ftb.ca.gov.

If the LLC underpays the estimated fee, a penalty of 10% of the amount of any underpayment will be added to the fee. No penalty will be imposed if the estimated fee paid by the due date is at least the amount of the fee for the LLC for the preceding taxable year. (This exception isn’t available for the initial taxable year of an LLC.)

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

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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 in 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 it’s 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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Deadline for registered domestic partners’ property tax claim is June 30, 2009.

Individuals who became registered domestic partners before January 1, 2006 have until June 30, 2009 to file a claim for refund relating to California property tax reassessments relating to a death of their partner or to a termination of the relationship.

Reassessments were imposed because, before 2006, registered domestic partners were treated as unmarried persons under California’s property tax laws.

Under a law enacted during 2007, the reassessments can be reversed.

For assistance, call your local county assessor. Information might also be posted at the web site for your county assessor.

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California property tax appeals’ due dates.

When you receive your notice of assessed value for California real estate, study it to see if it is reasonable. If it appears to be in error, first try calling your county assessor’s office. They might agree to reduce the value informally.

The regular filing period for formal appeals will begin on July 2, 2009. For most counties, the deadline for filing appeals for 2009 will be November 30, 2009. The deadline for Alameda, Inyo, Kings, Orange, Placer, San Francisco, San Luis Obispo, Santa Clara, Sierra and Sutter counties is September 15, 2009.

Private companies are offering assistance in filing appeals for a fee. You can file the appeal yourself for free.

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"Official" form for California LLC filing is a scam.

A company in Los Angeles is offering to prepare the annual Limited Liability Company Statement of Information. The proposed fee to "avoid penalties, fines and suspension" that the recipient is told to "remit immediately" is $228. The annual fee due to the California Secretary of State is $20.

The LLC is required to file Form LLC-12R, Statement of Information – Limited Liability Company, if there were no changes from the prior year, or Form LLC-12, Statement of Information – Limited Liability Company, if there were changes. You might receive the forms in the mail from the Secretary of State or get them online at www.sos.ca.gov/business/bpd_forms.htm#be.

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Refund claims for LLCs with out of state operations due August 20.

The Franchise Tax Board has issued instructions to make a claim for refund of a California LLC fee when an LLC had out of state operations under the Ventas decision. The potential refund doesn’t apply for taxable years beginning on or after January 1, 2007. You can get the details at www.ftb.ca.gov/professionals/taxnews/2009/June/Big_Business.shtml.

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Free foreclosure assistance.

In a June 5, 2009 San Jose Mercury News article, "Foreclosure’s Front Line", reporter Mike Cassidy listed some organizations that offer free assistance to those facing forclosure in Santa Clara County, with a caution that they are swamped with requests for help. They are usually only successful in helping about a fourth of the people who apply.

Project Sentinel: 408-720-9888, press 3, or go to the web site: www.housing.org/contact_us.htm.

Neighborhood Housing Services: 408-279-2600, www.nhssv.org.

SurePath Financial Services: 800-540-2227 or go to the web site: www.tengodeudas.org.

EPA Can Do (East Palo Alto): 650-473-9838 or go to the web site: www.epacando.org/.

City of San Jose’s Foreclosure Help Center: 408-794-1242, www.foreclosurehelpscc.org.

Another suggestion? Try asking your representative in Congress for help.

Good luck!

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More guidance issued for small business net operating loss election.

An optional three-, four-, or five- year carryback of an applicable 2008 net operating loss (NOL) was enacted in the American Recovery and Reinvestment Act of 2009. The IRS has issued additional guidance about how to make the election.

A taxpayer that has not filed a tax return for the tax year in which the applicable 2008 net operating loss arises makes the election for an extended carryback period by attaching a statement to his federal income tax return for the year. The return and statement must be filed by the due date, including extensions, for that year.

If the tax year of the applicable 2008 NOL ended before February 17, 2009, the election must be made before the later of the due date (including extensions) of the taxpayer’s return or April 27, 2009.

A taxpayer that has already filed a return and did not make the election to claim an extended carryback period (and also did not forego the NOL carryback period) can make the election by simply filing an amended return for the earliest year to which the NOL is carried. Alternatively, the "quick refund" forms 1045 or 1139 may be used, but they must be filed within six months after the due date (without extensions) of the income tax return for the year of the applicable 2008 NOL (or April 17, 2009, if later) instead of 12 months after the tax year of the net operating loss.

(Revenue Procedure 2009-26.)

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IRS issues new actuarial tables.

The IRS has issued new actuarial tables for valuing annuities, life estates, term interests, remainders and reversions. These tables are critical for computations relating to charitable gift planning and personal residence trusts.

The tables are effective for valuation dates after April 30, 2009. For Gift tax purposes, transfers from May 1, 2009 through June 30, 2009 may be valued using the new tables or the previous tables.

The increased life expectancy under the new tables causes life interests to have a higher value and remainders or reversions to have a lower value. Charitable remainder trusts are less desirable and charitable lead trusts are more desirable. Private annuities are also more desirable.

The differences are small, so the tables shouldn’t have a dramatic effect on most charitable, estate and gift planning decisions.

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Tax Court includes QTIP trust in surviving spouse estate and upholds some benefits of family partnership.

Valeria Miller’s husband was an avid investor, using a charting methodology. Valeria and her husband were residents of Indiana.

After Mr. Miller’s death on February 2, 2000, the property of Mr. and Mrs. Miller were divided into a qualified terminable interest (QTIP) trust and a survivor’s revocable trust. Most of the assets were investments.

Valeria then formed a family limited partnership in late 2001. She retained 940 units of the partnership and made gifts of the remaining units to her children. The manager of the partnership was Virgil G. Miller, son of Mr. and Mrs. Miller. Virgil continued to apply the charting methodology that he had learned from his father. Virgil also was the trustee of the trusts.

Valeria made additional transfers to the family partnership in April 2002 and in May 2003. Her health suddenly declined and she died on May 28, 2003.

Virgil omitted the QTIP trust on Valeria’s federal estate tax return. He claimed she never received income distributions from the trust and didn’t need the assets. Effectively, he treated the trust as if it was disclaimed.

He also claimed a 35% lack of marketability discount for the family limited partnership interests that Valeria still owned at her death. There was no special reporting relating to Valeria’s transfers to the partnership during 2002 or 2003 (except on gift tax returns).

The IRS said the QTIP should be included in Valeria’s taxable estate.

The IRS did not contest the discount for the partnership interests, but said the transfers in 2002 and 2003 should be included at full value.

In a memorandum decision, the Tax Court agreed with the IRS that the QTIP should be included in Valeria’s taxable estate. The condition for claiming a marital deduction for the trust on her husband’s federal estate tax return was an agreement to include the trust on her federal estate tax return.

The Tax Court found that the 2002 transfer to the family partnership was a legitimate gift with a reasonable business purpose for the professional management of the assets and liability protection. There was no special treatment required for the 2002 transfer.

The Tax Court found the 2003 transfer was made because of Valeria’s declining health. It should therefore be included in Valeria’s taxable estate at full value, without a discount.

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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?" (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 June 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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