Michael Gray, CPA's

Real Estate Tax Letter

July 10, 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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2009 is half over. How is it going?

Time is passing quickly. (Again!) How is 2009 going? Should we be meeting to discuss your tax developments? Do you need to have an estate plan created or reviewed? To make an appointment, call Dawn Siemer at 408-918-3162 on Monday, Wednesday or Friday.

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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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Multi-State LLCs must file California fee refund claims soon.

As I mentioned in the June issue of this newsletter, LLCs with operations in several states might need to file additional documentation with the Franchise Tax Board to receive a refund of excess LLC fees paid for years before 2007. The information should be submitted by August 20, 2009. For details, look up "Notice 2009-04" at www.ftb.ca.gov.

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Watch your 2009 California withholding.

The California Employment Development Department issued new withholding tables during late April, 2009. The tables reflect increases in California’s income tax rates.

You should review your California withholding to be sure it will be sufficient to avoid penalties for underpayment of estimated tax.

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Ninth Circuit says overstated basis doesn’t result in extended limitations period.

The Ninth Circuit Court of Appeals has ruled that the statute of limitations for the IRS to assess a deficiency on an income tax return is not extended when the full sales price of property is reported but the tax basis (cost for computing gain or loss) is overstated. (Some courts have ruled otherwise.)

(Bakersfield Energy Partners, LP, 2009-1 USTC ¶50,435, June 9, 2009.)

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Exchange allowed between trust and siblings of deceased grantor.

The IRS has privately ruled that two surviving siblings and the trust of their deceased sister may exchange their undivided interests in farm property for 100% interests in subdivided lots of the same property, followed by a sale by the trust. A sale within a two-year period after the exchange by a related party would disqualify the exchange, but the trust was not a related person for this purpose. (The deceased sister’s husband was the beneficiary of the trust during his lifetime, with the remainder going to the children of the deceased sister after her husband’s death.)

(Letter Ruling 200920032, 2/3/2009.)

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Partnership permitted to move condemnation benefits to subsidiary partnerships.

P1, a partnership, had two equal partners. P1 was in the business of farming land that it owned. The land was condemned and the partnership elected to defer the income from the condemnation proceeds as an involuntary conversion.

One partner wanted to reinvest the proceeds in farm land, and the other wanted to reinvest the proceeds in commercial real estate.

In a private letter ruling, the IRS permitted P1 to form two subsidiary partnerships, P2 and P3. When the dust settled, Partner 1 would own a majority interest in P2 and Partner 2 would own a majority interest in P3. Half of the condemnation proceeds would be contributed to each of P2 and P3. P2 and P3 would be permitted to apply the deferral of income from P1’s condemnation for replacement property acquired by each partnership. P1 would distribute partnership interests in P2 to Partner 1 and P3 to Partner 2.

No taxable income would result from this "reorganization," called an "assets-over division."

This ruling is worthwhile studying for structuring a transaction in a similar situation. Remember you have to get your own private letter ruling for it to be binding on the IRS.

(Letter Ruling 200921009, 2/13/2009.)

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Questions and Answers


If I inherit property that was fully depreciated by the decedent, is the tax basis of the property the fair market value on the date of death and do I get to start depreciating the property over again?


Generally the answer is yes to both questions. You will need to establish the portion of the "fresh start" basis attributable to depreciable improvements. (Property inside an entity, such as an S corporation or corporation, won’t qualify for this treatment.)


How do I calculate the capital gains for the sale of my residence, which was converted from a 1031 exchange in 2002?


I suggest that you get professional help. The tax basis (cost to compute taxable income or loss) is reduced by the deferred income from the exchange. Since the property couldn’t be personal-use property to qualify for an exchange, you might have some taxable income not eligible for exclusion relating to depreciation claimed for the previous residence and your current residence before conversion.

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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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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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