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Michael Gray, CPA's

Real Estate Tax Letter

August 31, 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

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 wonít be enough to avoid penalties for underpayment of estimated tax, you should be making estimated tax payments based on last yearís tax liability or an annualized computation of this yearís tax. Call Dawn Siemer on Mondays, Wednesdays or Fridays 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?

The extended due date for 2008 calendar year corporate, partnership and fiduciary income tax returns is September 15, 2009. (Note the change for partnerships and fiduciaries! The extended due date for calendar year returns used to be October 15!) The extended due date for 2008 calendar year individual income tax returns is October 15, 2009.

If your 2008 income tax returns arenít done yet and you are seeking help from a tax return preparer, call Dawn Siemer on Mondays, Wednesdays or Fridays for an appointment at 408-918-3162.

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CreaTV broadcasts rescheduled.

My new television show, Financial Insider Weekly, is broadcast on Wednesdays at 4:30 p.m., Pacific Time. You can watch it on Comcast channel 15 if you live in San Jose or Campbell, California. The show is broadcast as streaming video at the same time at www.creatvsj.org. We will also be posting the shows to YouTube. Check at www.financialinsiderweekly.com for when they are posted. Eventually we will offer DVDs of the interviews for sale.

Interviews about short sales and foreclosures with attorney William Mahan of Campbell, California will be broadcast on September 2 and 9. (They were supposed to be broadcast on August 19 and 26.)

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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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Deadline approaches for electing extended NOL carryback period.

The IRS has issued a reminder to small businesses that calendar-year corporations and individuals who already filed income tax returns before the enactment of the American Recovery and Reinvestment Act of 2009 on February 17, 2009 have until September 15, 2009 for corporations and October 15, 2009 for individuals to elect optional carryback periods of three, four or five years for net operating losses incurred during 2008. (IR-2009-72.)

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Foreign bank account reporting further extended.

The IRS has announced that taxpayers that only had signature authority over foreign accounts and taxpayers with foreign hedge funds or private equity accounts will have until June 30, 2010 to report accounts maintained in 2008 and earlier years using Form TD F 90-22. (Notice 2009-62.)

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Overstated basis doesnít extend statute of limitations.

A panel of the Court of Appeals for the Federal Circuit has ruled that the IRS could not use a six-year statute of limitation period in IRC Section 6501(e)(1)(A) because an overstatement of basis is not an omission from gross income.

(Salman Ranch, Ltd., 2009-2 USTC ∂ 50,528, July 30, 2009.)

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IRS offers reporting tips for rental real estate.

The IRS has posted tips to its website about reporting responsibilities for rental real estate income. Here is a link for the tips: www.irs.gov.

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Taxpayer wins! LLC interest isnít the same as limited partnership interest for passive activity limitation.

The IRS disallowed deductions for losses from an LLC, claiming they were subject to limitation as passive activity losses. The taxpayer owned 99% of the LLC, and was the sole managing member.

The taxpayer filed for summary judgment that the IRS was wrong, and the Federal Court of Claims ruled in favor of the taxpayer.

The Court agreed with the taxpayer that 1) An LLC is not a partnership under state law, so a member of an LLC isnít a limited partner; 2) LLCs are distinguished from limited partnerships because, in order to qualify for limited liability protection, a limited partner canít be actively involved in the management of the business; 3) The passive activity loss rules were designed to limit losses for tax-sheltered investments in which the investor didnít actively participate. LLC members are permitted to actively participate and so they werenít intended "targets" of the loss limitation rules.

This probably isnít the last word on this issue Ė especially for LLC members who are passive investors. Their losses would probably be limited under the tests for material participation anyway.

(Thompson v. U.S., U.S. Court of Federal Claims, 2009-2 USTC ∂ 50,501. (July 20, 2009.))

The Tax Court made a similar summary judgment ruling in Garnett, 132 T.C. No. 19, June 30, 2009.

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Bankrupt Qualified Intermediaries result in taxable gain for like-kind exchanges.

The IRS has released three letters it sent to congressmen as responses to inquiries about whether taxpayers were required to recognize gain when a qualified intermediary holding funds for a tax-deferred exchange filed for bankruptcy, preventing the intermediary from transferring the funds to acquire a replacement property.

The IRS said that no exemption from the 180-day period to complete an exchange is currently available. Legislation is pending to suspend the replacement period in the case of bankruptcy, but itís uncertain whether the legislation will be enacted.

The IRS also indicated taxpayers might be able to claim an offsetting loss under Internal Revenue Code Section 165.

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Federal assistance payments under Home Affordable Modification Program are tax exempt.

Under the Home Affordable Modification Program, homeowners who have defaulted or are at risk of default on their mortgages can become eligible for federal Pay for Performance Success Payments of up to $1,000 per year for principal reduction for up to five years when they make timely payments on their modified loans.

The IRS has ruled these payments are tax exempt under the general welfare exclusion.

(Revenue Ruling 2009-19, June 24, 2009.)

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Cash for Clunkers is not a tax credit.

The federal Cash for Clunkers program is not a federal tax credit to be applied on an income tax return of the person who buys a vehicle. These are subsidy payments made directly to auto dealers and are taxable income for the auto dealer.

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Cash for Clunkers credit is taxable by California.

The California Franchise Tax Board has announced California does not conform to a federal exclusion of the federal subsidy. California taxpayers who receive the subsidy when they purchase cars during 2009 may be surprised to learn they have additional California taxable income. (Spidellís California Taxletter, August 1, 2009.)

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California withholding and estimated tax will be messy.

As part of the shell game to balance Californiaís state budget, there will be changes in withholding and estimated tax payments.

Effective for payments on or after November 1, 2009:

  • Withholding on wages increases by 10%;
  • Withholding on supplemental wages increases from 6% to 6.6%;
  • Withholding on stock options and bonus payments increases from 9.3% to 10.23%.

For estimated tax payments of noncorporate taxpayers for 2010, 30% will be due for the first quarter, 40% will be due for the second quarter, 0% for the third quarter(!), and 30% for the fourth quarter.

Effective for payments on or after January 1, 2010, California will require that 7% backup withholding be made when a California taxpayer is subject to federal backup withholding. Backup withholding will apply for payments subject to Californiaís withholding at source statute, including rents, prizes, compensation for services and other fixed or determinable periodic income, but excluding interest and dividends and the release of loan funds by a financial institution in the normal course of business.

Businesses that have a local business license, have at least $100,000 of gross receipts from business operations, and do not collect sales taxes will also be required to register with the State Board of Equalization to report any use tax owed for purchases made during the preceding year. The initial use tax return will be due April 15, 2010.

(Spidellís California Taxletter, August 1, 2009.)

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Questions and Answers

Question

I am getting a construction loan. Can I use it for the First-Time Homebuyer Credit? If I donít have permanent financing in place but I occupy the home before December 1, 2009, will I still qualify for the credit?

Answer

There is no language relating to financing in the law relating to the First-Time Homebuyer Credit. As long as you occupy the house before December 1, 2009 and you otherwise qualify (no phase out for income, no principal residence for the three-year period before the purchase, etc.), you should be able to claim the credit.

The purchase price is the tax basis or cost accumulated up to the date the residence is purchased, which is the date you occupy the residence when you construct the residence yourself.

See the article at www.realestateinvestingtax.com/first.shtml.

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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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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 August 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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