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Michael Gray, CPA's

Real Estate Tax Letter

December 7, 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 Holidays!

2009 is ending with hopeful news for a better year ahead.

We hope you enjoy a Happy Holiday season.

If you are well-off financially, we hope you are able to give generously to help those who are less fortunate than you are. If you aren’t so well off this year, we hope next year will be a much better one for you.

Our office will be closed on Christmas Eve day, Christmas day and New Years day.

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Now is the time for year-end planning.

There are 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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Holiday season half-price sale.

As a holiday special offer, you can buy a copy of our Real Estate Tax Handbook, 2008 Edition for half price. The offer expires on December 31, 2009. Fax or mail this order form www.realestateinvestingtax.com/holidayorder.shtml.

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Remember to make your property tax payment.

The due date of the first installment of California real estate tax is December 10. There is a nasty penalty for making a late payment, so remember to make your payment on time.

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Calendar corporate estimated tax payment is due December 15.

The fourth quarter estimated tax payment for calendar-year corporations is December 15. The rules for how much needs to be paid in to avoid estimated tax penalties have become complex, depending on the facts for your corporation. See your tax advisor about how much you should deposit.

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Financial Insider Weekly broadcast schedule for December and January.

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 December and January:

December 9, Phil Price, EA, "Retirement plans for closely held businesses"
December 16, Dick Blakely, "Benefits of a family office"
December 23, Tom Oviatt, "Home mortgage developments"
December 30, attorney Bernard Vogel, III, "Choices of forms for conducting closely-held businesses"
January 6, attorney David Kirsch, "Preparing for an IRS audit"
January 13, attorney David Kirsch, "When you owe taxes to the IRS"
January 20, attorney Bill Mahan, "Why you need a Will"
January 27, attorney Bill Mahan, "Estate and financial issues relating to your title to property"

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."

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. 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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IRS updates FAQs for first-time homebuyer credit.

The IRS has updated its questions and answers about the first-time homebuyer credit at its web site to incorporate recent law changes.

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Should you make a state income tax payment before the year end?

Usually you get the best tax result by matching deductions like state income taxes with the related income. Since itemized deductions for taxes aren’t allowed when computing the alternative minimum tax, you need to actually "crunch" your numbers to find out if this will really benefit you.

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Possible estate tax repeal a problem.

Under the Bush tax cuts, the federal estate tax is scheduled to be repealed for one year in 2010. If this happens, many estate plans that are designed around the estate tax rules won’t work. It will create a big mess of delays for estates and trusts of decedents who die during 2010 until the situation is stabilized by an extension of the tax by Congress. Legislation has been introduced and has passed in the House of Representatives to extend the estate tax for 2010 or make it permanent, but it might not pass in the Senate before the end of 2009 because of debates on health care reform legislation.

Consider consulting with your attorney for a contingency plan.

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Eighth Circuit upholds formula disclaimer clause.

The Eighth Circuit Court of Appeals found in favor of the taxpayer relating to an estate tax deduction for a gift to a charity by disclaimer. The decedent specified that 25% of disclaimed interests initially left to her daughter would pass to a charitable foundation. Some time after the decedent’s death, the IRS and the decedent’s estate settled on an increased valuation of the estate, which also increased the charitable deduction.

The IRS claimed that because the overall value of the estate wasn’t determined as of the date of death, the transfer to the charitable foundation was dependent on the performance of some act or occurrence of a precedent event, in violation of public policy.

The court said that it wasn’t unreasonable that the donation should be based on the final valuation of the estate, according to the IRS’s own regulations.

Owen Fiore has written an analysis of this case at owenfiore.typepad.com/notes/2009/11/value-adjustment-clauses-are-viable-ala-christiansen.html.

(Estate of Christiansen, CA-8, USTC 2009-2, ¶ 60,585, November 13, 2009.)

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2010 Standard Milage Allowance announced.

The IRS has announced the standard mileage allowance for employees, self-employed individuals or other taxpayers for claiming deductions for business, charitable, medical and moving expenses.

The business rate for 2010 is 50˘ per mile. It was 55˘ per mile for 2009. (Prices include 23˘ for 2010 and 21˘ for 2009 per mile of depreciation reducing the tax basis of the vehicle.)

The medical and moving rate is 16.5˘ per mile for 2010. It was 24˘ per mile for 2009.

The charitable rate is 14˘ per mile for 2010, the same as for 2009.

(Revenue Procedure 2009-54.)

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Questions and Answers

Question

My friend purchased a condo 4 or 5 years ago for $310,000. She used it as a rental property. The market value of the condo kept decreasing each year and the renter failed to pay the rent. She couldn’t make the mortgage payment.

The condo was sold in a short sale for $120,000 and the bank forgave the balance of the debt, about $280,000.

Does she need to pay tax on the debt forgiveness? If so, can she deduct the loss from the sale of the property?

Answer

Your friend may have cancellation of debt income but also might qualify for an exclusion due to insolvency. She also might qualify to claim a deductible loss for the sale of the property.

I actually don’t have enough information to answer your question, including whether the debt was recourse or non-recourse. For more information, see my article on Short Sales and Foreclosures at www.realestateinvestingtax.com/shortsale.shtml and IRS Publication 4681 at www.irs.gov/pub/irs-pdf/p4681.pdf. Your friend needs to consult with a tax advisor and possibly a real estate attorney.

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

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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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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 December 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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