Michael Gray, CPA's

Real Estate Tax Letter

January 11, 2010

© 2010 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 New Year!

The first decade of the second millennium is over. Most of us are glad to see it end.

We started with the "Y 2K" scare, which turned out to be a non-starter. We had the World Trade Center attack on September 11, 2001. We had two bubbles and stock market crashes, with the market gains of the decade erased. The worst recession since the Great Depression is ending with a "jobless recovery." Yuck!

On the plus side, we have had two of our children married to great partners and three beautiful grandchildren.

Life goes on! I believe and hope better times are ahead.

It's time to make new goals and a "timetable of success."

Remember the old saying, "People don't plan to fail; they fail to plan."

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Tax preparation materials are on the way.

We are mailing instructions to those of you who use the online Tax Notebook this week. If you use a paper organizer, you should have already received it. If we prepared your tax returns last year and you haven't received instructions by January 15 or you would otherwise like to receive instructions, call Dawn Siemer on a Monday, Wednesday or Friday at 408-918-3162.

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Make your tax preparation appointment now.

If you would like to schedule an appointment for a tax preparation interview, also please call Dawn Siemer on a Monday, Wednesday or Friday at 408-918-3162.

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Yes, we do prepare income tax returns!

With our free newsletters and the information we make available at no charge on the web, some people wonder how we make a living. We prepare income tax returns and provide tax and business consulting services. We are accepting selected new clients and are thrilled when our clients and friends refer their friends, associates and family members to us. To inquire about becoming a client of our firm, please call Dawn Siemer at 408-918-3162 or send an email to her at mgray@taxtrimmers.com. We must receive your tax information by March 1 to guarantee delivery by April 15.

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Time to revisit your home loan?

Home loan interest rates are still low. For many homeowners, there is a refinancing opportunity now. We provide home loan brokerage services through our strategic partner, Wymac Capital, Inc. To explore whether we can help get financing for your new home, reduce the interest rate on your mortgage, or convert an adjustable rate mortgage to a fixed-rate mortgage, call Michael Gray at 408-918-3161.

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Final 2009 estimated tax payment is due January 15.

Remember the final estimated tax payment for calendar-year individuals, estates and trusts is due January 15. You might want to check with your tax advisor about reducing the payment if you had much lower capital gains in 2009 than in 2008, you are entitled to the increased federal refundable minimum tax credit, or your facts have otherwise changed.

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W-2s, 1099s and DE 542 reminder.

Remember that most 2009 annual information returns, such as W-2s and 1099s, should be issued to payees by January 31 and sent to the tax authorities by March 1.

Also remember that Form 542, Report of Independent Contractors, should also be submitted for ongoing independent contractor arrangements by January 20. The due date is the earlier of 20 days after the date $600 or more of payments have been made to the independent contractor or the date a contract has been entered for $600 or more of services during a calendar year.

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Estates and trusts should consider making distributions.

Complex trusts and estates that have a calendar year end can elect to treat distributions made up to March 6, 2010 as made during 2009. Trustees and executors should update their tax records and review their situation with a tax advisor to determine whether a distribution should be made. Remember to discuss the situation with affected beneficiaries, since taxable income will be shifted from the estate or trust to the beneficiaries.

A reason for shifting the income is estates and trusts with taxable income over $11,200 are subject to the maximum 35% federal tax rate.

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Update your payroll tax tables.

Many businesses don't update their accounting software each year. Remember to update your payroll tax tables before processing your first 2010 payroll, or it will probably be in error.

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Bush tax cuts to expire after 2010.

2010 will be an unusual year for tax planning because many tax rates will probably increase in 2011. As presently scheduled, the maximum personal income tax rate will increase to from 35% to 39.6% and the maximum rate for long-term capital gains will increase from 15% to 20%. Many taxpayers will choose to accelerate income to 2010, including selling securities to report long-term capital gains. Remember, the wash sale rules don't apply to gains, so you can repurchase stock that you have sold at a gain and establish a new tax basis and holding period for the replacement stock.

The tax break for qualified dividends, subjecting them to the same maximum 15% income tax rate that applies to long-term capital gains, is also scheduled to expire, which could result in tax rates up to 39.6% applied to qualified dividends.

There are tax benefits to having an S corporation with no accumulated earnings and profits from years before the election was made. The S corporation can elect to have distributions apply to any accumulated earnings and profits before distributing the current S corporation income. If you have such a corporation and haven't already made the election, consider doing so during 2010.

There are many more changes, including expired tax benefits, that are up in the air pending action by Congress.

Before taking action on any of these items, consult with a tax advisor for a "sanity check" relating to your personal situation.

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AMT exclusion unknown for 2010.

With the debate over health care reform, Congress wasn't able to address many important tax issues for 2010, including the AMT exclusion. Watch for legislation during 2010.

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See our special reports for 2010 "hot topics."

We are including with this newsletter three reports about business debt cancellation, estate tax repeal and converting an IRA to a Roth. Be sure to look them over to see if they apply to you:

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Financial Insider Weekly is broadcast in more communities.

KMVT, cable channel 15 in Cupertino, Mountain View and Los Altos has agreed to broadcast my weekly television show, Financial Insider Weekly. The shows will be broadcast at 4 p.m. Friday afternoons. Check it out and tell your friends!

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Financial Insider Weekly broadcast schedule for January and February.

Financial Insider Weekly is broadcast in San Jose and Campbell on Wednesdays at 4:30 p.m., Pacific Time. You can watch it on Comcast channel 15 for those cities. The show is broadcast as streaming video at the same time at www.creatvsj.org.

Here are the scheduled interviews for January and February:

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"
February 3, Professor Patricia Cain, "Income tax problems of same sex couples"
February 10, Professor Patricia Cain, "Estate and gift tax problems of same sex couples"
February 17, David Beck, "Applying for financial aid for higher education"
February 24, David Beck, "Evaluating and appealing university offers and student loans"

Back episodes available at https://www.youtube.com/user/financialinsiderweek.

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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New California penalty for failing to file change in ownership statements.

An acquiring person, including a trust or legal entity (partnership, LLC or corporation), must file Form BOE 100-B with the California State Board of Equalization within 45 days of a change of control or change in ownership of California real estate.

Beginning January 1, 2010, new California law SB 816 provides that a penalty applies if the legal entity doesn't file Form BOE 100-B within 45 days from the earlier of 1) the date of change in control or change in ownership; or 2) the date of written request by the California State Board of Equalization.

The penalty is 10% of the real property taxes based on the reappraised amount if a change in ownership occurred. If no change in ownership occurred, the penalty is 10% of the current year's real property taxes.

Changes in ownership can occur from certain changes in title for the real estate or from changes in ownership of the legal entity that owns the real estate. The rules are too involved to list in detail here. See your attorney and/or tax advisor.

The Board of Equalization receives notices from the California Franchise Tax Board when questions about change of ownership are answered "yes" on California corporate and partnership income tax returns. The Board of Equalization uses this information to request reports from the entity.

Note that a change of ownership can take place at death. With the time it takes to administer an estate or trust, it will be a hardship for an executor, administrator or trustee to file this report in time. The executor or administrator of the estate might not even be appointed within the 45 days! Hopefully there will be a "reasonable cause" waiver of the penalty for this situation.

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Questions and Answers


I inherited real property appraised at $550,000 at the time of my mother's death on February 26, 2008. I recently sold the property for $390,000 on December 21, 2009. Improvements were made to the house. The house was never occupied or rented. Can I claim this loss?


I'm going to assume this was your mother's residence. (If it wasn't, you can clearly claim the loss.)

The situation of an inherited residence is more involved. The IRS Chief Counsel's office says in SCA 1998-012 that no loss can be claimed from the sale of a decedent's personal residence unless the property has been converted to an income-producing purpose (such as a rental).

The Tax Court ruled in favor of taxpayer's claiming long-term capital losses from sales of inherited residences in two cases, Pauline Miller Estate, TC Memo 1967-44, 26 TCM 229 (1967) and H.V. Watkins, TC Memo 1973-167, 32 TCM 809 (1973). In the Watkins case, the surviving husband and children lived in the home for six months after the decedent's death before moving out and selling it.

If you decide to claim the loss, consider disclosing the authority on your income tax return and be prepared for a wrestling match with the IRS.

(By the way, I would not convert the house to a rental at this point, because the IRS will still try to limit the depreciable basis to the fair market value when it is converted to a rental.)

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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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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