Michael Gray, CPA's

Real Estate Tax Letter

February 5, 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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Remember, Valentine's Day is February 14!

My daughter and her husband, Holly and Dan Baker, tell me their restaurant, Marché aux Fleurs, is fully booked for Valentine's Day. Hope you've made your reservation for your favorite restaurant. Janet and I will be babysitting two of our favorite "Valentines," our grandsons Panch and Clive Baker, while their parents are working at their restaurant.

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Tax season is here! Make your appointment now!

There are only about two and one-half months left before the tax return due date. Time to get started now!

If we prepared your income tax returns last year, you should have already received instructions in the mail. If you haven't, please call Dawn Siemer at 408-918-3162.

To have us prepare your income tax returns, start with the online Tax Notebook organizer. Call Dawn Siemer at 408-918-3162 for instructions to get started. We also have a paper organizer, if you prefer. We still need your documents (W-2s, 1099s, receipts for donations) to prepare your income tax returns.

We can prepare most income tax returns using information provided online and by mail. If you wish a personal meeting, please call Dawn Siemer at 408-918-3162 to schedule an appointment. Our calendar is filling up fast!

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Time to revisit your home loan?

Home loan interest rates are still low. The refinance loans that we offer are mostly on a no-points, no-fees basis. This gives the homeowner more flexibility for refinancing again in a short time. For example, one of our clients closed a mortgage with a 5.375% interest rate on September 26, 2009. Recently the client locked a 4.875% interest rate for refinancing the same loan, for a half percent rate reduction with no points and no fees. It doesn't happen often, but it's possible.

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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Is the San Jose Real Estate Investors Association for you?

Michael Gray, CPA recently became an affiliate of the San Jose Real Estate Investors Association (SJREI). This is a great educational and mutual support organization. The exchange of information among the participants is as helpful as the presentations by the speakers. If you are interested in investing in real estate, I highly recommend it. They have evening meetings in the East Bay and South Bay on the first Wednesday and Thursday of the month, and a Mid-Peninsula evening meeting the third Tuesday of the month. Other than the Holiday luncheon, meals aren't served to keep the required investment down. For details, visit their web site at www.sjrei.net.

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New partnership form will be easy to miss or make errors in reporting.

The IRS has issued new partnership form 1065, Schedule B-1, Information on Partners Owning 50% or More of the Partnership. This form hasn't been required in the past. Since ownership includes attribution from certain family members and trusts, several partners in a family partnership could show ownership interests up to 100%. (The attribution rules are complex and beyond the scope of this alert. Get professional advice.) It will look weird because the percentages might add up to more than 100%.

Heads up!

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Documentation Requirements For Homebuyers Credit will mean headaches for many.

Many taxpayers will be surprised to learn that copies of documents must be included with their income tax returns in order to qualify for the federal New Homebuyers Credit. Consequently, those who claim the credit for 2009 will be ineligible for e-filing.

When claiming this credit, taxpayers should study the instructions for Form 5405 carefully. Those who claim the new $6,500 long-term resident credit will have to include copies of one of the following items for five consecutive years during the last eight-year period: 1) Form 1098 Mortgage Interest Statement (or substitute); 2) property tax statement; or 3) homeowner's insurance statement. Many people will not have kept these records. If you don't provide the documentation, the credit will be disallowed.

In addition, a copy of the property settlement statement (HUD-1) for the purchase of the residence for which the credit is being claimed, including signatures of the buyer and seller, is required to be included with the tax return.

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Passive Activity Loss reporting rules changed.

The IRS has modified its reporting requirements for taxpayer groupings of activities under the passive activity loss rules. Pre-existing groupings only need to be reported when there is a change. The names, addresses and employer identification numbers should be reported for the trade or business activities or rental activities being grouped as a single activity on the statement with the original income tax return for the year of the original or changed grouping (adding another entity to a group). (Revenue Procedure 2010-13.)

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Debt secured by interest in a disregarded entity ruled qualified real property debt.

An exclusion is available for cancellation of qualified real property debt. The debt must have been incurred or assumed "in connection with" real property used in a trade or business. In this case, the taxpayer originally acquired property as an office and retail commercial rental property. Subsequently, part of the property was converted to residential rental units. A controlled management company provides day to day management of the operation and maintenance of the property. The IRS relied on the taxpayer's representation that the property is used in a trade or business.

(There is a potential issue on audit whether the management activity is sufficient to be a trade or business. This is a question of the facts and circumstances in each case.)

There were various layers of disregarded entities (single owner LLCs) involved. In this case, the mortgage was secured by the interest in an LLC that owned the real property.

The IRS ruled the debt was effectively secured by the real estate held by the LLC, and was qualified real property debt for the exclusion.

(Letter Ruling 200953005, September 23, 2009.)

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Some California businesses are required to file use tax returns.

California businesses that reported more than $100,000 in gross receipts from a business or rental property on their 2007 federal income tax returns and that don't file sales tax returns will be required to electronically file a California use tax return for 2009. The California State Board of Equalization is mailing notices in early March 2010. The use tax returns and tax payments are due April 15, 2010. A use tax return must be filed even if there is no tax due.

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Financial Insider Weekly broadcast schedule for February and March.

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 February and March:

February 10, Professor Patricia Cain, "Estate and gift tax problems of same sex couples"
February 17, David Beck, CFP, "Applying for financial aid for higher education"
February 24, David Beck, CFP, "Using tax benefits and student loans to pay college costs"
March 3, attorney Ray Sheffield, "Estate planning for retirement benefits"
March 10, John Herzog of Valley Community Bank, "Small business financing"
March 17, Tom Anderson of Pensco, "Real estate investments in your IRA or Roth account"
March 24, Tom Anderson of Pensco, "Alternative investments in your IRA or Roth account"

Financial Insider Weekly is also broadcast Friday afternoons at 4 p.m. on cable channel 15 in Cupertino, Los Altos and Mountain View. Starting next week, we will also be broadcast at 7 p.m. on Thursdays on cable channel 26 and AT&T U-verse channel 99 in Marin County.

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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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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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.

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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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