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Michael Gray, CPA's

Real Estate Tax Letter

November 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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Happy Thanksgiving!

Thanksgiving will be celebrated on November 26, this year. I hope you have many blessings to be thankful for.

With so much unemployment this year, many are less fortunate. Give generously to your local relief agencies.

I hope you are able to celebrate Thanksgiving with your family and friends. If you travel, travel safely.

Thanksgiving is the favorite holiday of my grandson, Panch Baker, because it is the one holiday when he has both sets of grandparents and all of his aunts and uncles together.

For our clients, thank you for your business. The purpose of our business is to serve you, and our existence depends on you.

For our readers, thank you for subscribing to our newsletter. We hope you will continue to find reading it enjoyable and rewarding.

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Now is the time for year-end planning.

Now that Halloween is past, we know the year will soon be over. Michael Gray and Dawn Siemer will be taking a family vacation from November 9 through 13, and of course we will be closed on Thanksgiving and the day after and on Christmas Eve and Christmas Day. That means there will be a limited number of year-end planning appointments available. Make your reservation now by calling Dawn Siemer at 408-918-3162.

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Financial Insider Weekly broadcast schedule for November and December.

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.

Here are the scheduled interviews for November and December:

November 11, attorney Naomi Comfort, "Handling retirement accounts after a death"
November 18, Kathleen Wright, American Red Cross, "Financial preparation for a disaster"
November 25, attorney John Hopkins, "How and why to promote community giving in your family"
December 1, attorney Frank Doyle, "Estate planning in uncertain times"
December 8, Phil Price, EA, "Retirement plans for closely held businesses"
December 15, Dick Blakely, "Benefits of a family office"
December 22, Peter Moss, CPA, "Home mortgage developments"
December 29, attorney Bernard Vogel, III, "Choices of forms for conducting closely-held businesses"

Past episodes of Financial Insider Weekly are posted at YouTube. The easiest way to watch them is to go to our web site, www.financialinsiderweekly.com, and click on "past episodes."

Eventually we will offer DVDs of the interviews for sale.

Let me know any ideas that you have for topics or guests. Guests will usually have to be located in or near the Silicon Valley in California.

Hope you can watch or record the show. Please tell your friends about it!

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Time to revisit your home mortgage?

We are continuing to experience refinancing opportunities when the stock market goes down, 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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Accelerated tax benefits for equipment purchases are expiring.

Two stimulus provisions for purchases of depreciable business assets are scheduled to expire unless Congress acts to extend them.

One is 50% bonus depreciation, which only applies to certain new depreciable business property. Currently, the election to claim 50% of the cost as a depreciation allowance in the year of purchase is scheduled to expire for assets purchased after December 31, 2009.

The limitation for first-year depreciation for automobiles has been increased to $11,060 from $3,060 for 2009. The increased limitation will expire after 2009. Remember the vehicle must be used more than 50% for business.

The first-year expensing limit for tax years beginning in 2009 is $250,000 (formerly $125,000), with a phaseout beginning at $800,000 (formerly $500,000).

Shorter depreciation schedules for certain assets, including machinery and equipment used in farming and leasehold improvements for restaurants and retail establishments are also scheduled to expire for purchases after December 31, 2009.

Now is the time to review whether any year-end equipment acquisition purchases should be made to secure greater tax benefits before they expire.

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Estate plans need review.

The estate planning community is in a state of confusion because nobody knows what the estate tax law will be for 2010. Congress has failed (so far) to enact a "patch" extending the current rules. Otherwise, the estate tax will be repealed for 2010, and almost all estate plans will not "fit" that scenario.

In addition, California has modified its rules for "no contest clauses." If your estate plan includes a no contest clause that is important to you, you should consult with your attorney about it now. Attorneys that I have heard comment about no contest clauses recommend that you avoid them unless they are absolutely necessary.

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Family gift opportunity.

Since real estate values are low right now and interest rates are also low, this is an excellent time to consider making real estate transfers to family members. If you would like to discuss this further, call Michael Gray at 408-918-3161 after November 15.

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Roth IRA canít hold S corporation stock.

The Tax Court ruled that a corporation wasnít eligible to make a Subchapter S election because some of its stock was held by a Roth IRA. A Roth IRA is not a qualified shareholder for the stock of a Subchapter S corporation.

(Taproot Administrative Services, Inc. v. Commissioner, Dec. 57950, 133 TC No. 9.)

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Congress passes extension of first-time homebuyer credit.

On November 4, the Senate passed H.R. 3548, the Worker, Homeownership and Business Assistance Act of 2009. The House passed the bill on November 5 and President Obama signed the legislation on November 6. The bill will extend the first-time homebuyer credit to homes for which there is a binding purchase contract before May 1, 2010 provided the sale is closed before July 1, 2010.

The first-time homebuyer credit of up to $8,000 ($4,000 for a married person filing a separate return) was previously scheduled to expire on November 30, 2009.

A credit of up to $6,500 ($3,250 for married persons filing separate returns) will also be available for home buyers who have lived in another principal residence for a five- consecutive-year period during the 8-year period ending on the date of the purchase of a subsequent principal residence, effective on the date of enactment, with the same expiration date as the regular credit.

The adjusted gross income thresholds for phasing out the credit will be increased from $75,000 to $125,000 for singles and $150,000 to $225,000 for married, with joint returns, effective on the date of enactment.

The credit will not be allowed for a home if the purchase price exceeds $800,000, effective on the date of enactment. (This will knock out many home purchases in Silicon Valley!)

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Deduction for sales tax for new vehicle purchase set to expire.

Unless Congress takes action to extend it, the tax deduction for sales tax on up to $49,500 of the cost of a new vehicle is set to expire after December 31, 2009. Remember the deduction phases out for joint married filers with adjusted gross income over $250,000 and for single taxpayers with adjusted gross income over $125,000.

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How to foul up a corporation for a real estate agent.

David Martin is a real estate agent for RE/MAX. James Clark, Martinís tax return preparer, helped Martin set up a corporation for his real estate business. The corporation was a regular "C" corporation.

Commissions checks were deposited to the corporate account, but expenses werenít generally paid by the corporation. An accountable expense reimbursement plan wasnít set up for the corporation. No wages were paid by the corporation to Martin, but paid Martinís personal expenses and business expenses.

On audit, the IRS reclassified the payments of personal and business expenses to Martin as compensation, subject to employment taxes.

In a memorandum decision, the Tax Court found that, since Martin was a corporate officer who rendered significant services to the corporation, he was an employee of the corporation.

Since there was not an accountable plan for the expense reimbursements, the payments were includable in his Form W-2 wages, and the expenses were deductible on his personal income tax return as employee business expenses, subject to a 2% of adjusted gross income floor (and not deductible for the alternative minimum tax).

Since the liability for employment taxes was in dispute, employment taxes werenít currently deductible.

Although James Clark was formerly an IRS agent, he was not a CPA or an Enrolled Agent.

Unfortunately, James Martin had a very expensive lesson in receiving poor guidance.

(D. Martin, Dec. 57,963(M), October 14, 2009.)

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New transcript for for Home Affordable Modification Program.

The IRS has issued new Form 4506T-ES, Short-Form Request for Individual Tax Return Transcript, to help process mortgage applications under the Treasuryís Home Affordable Modification Program (HAMP). The form can be completed online at the IRS web site.

(IR-2009-96.)

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California withholding payment vouchers required starting 2010.

Effective January 1, 2010, businesses and individuals who submit payments for income tax withholding to the California Franchise Tax Board for real estate, resident and nonresident withholding will be required to send payment vouchers with their checks, whether information returns are filed on paper or electronically. Formerly, they were only required if the information returns were filed electronically.

The forms to be sent with payments are Form 592-V, Payment Voucher for Resident and Nonresident Withholding Submission, and Form 593-V, Payment Voucher for Real Estate Withholding Submission.

Here are more changes for California withholding for 2010:

  • The Franchise Tax Board will no longer accept withholding forms sent by fax;
  • Multiple copies of page two of Form 592, Resident and Nonresident Withholding Statement, should be used to list all payees. The Franchise Tax Board doesnít want a supplemental spreadsheet attached to the form.
  • Withholding on seller-financed installment sale payoffs, or prepayment in escrow that may occur in a sale, are reported by the real estate escrow person on Form 593 within 20 days following the end of the month in which the payoff occurred.

(Spidellís California Taxletter, November 1, 2009, p. 128.)

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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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Follow me on Twitter!

If you enjoy Twitter, please follow me at www.twitter.com/michaelgraycpa. I would especially appreciate retweets of our messages announcing episodes of Financial Insider Weekly.

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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 November 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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