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The December 2010 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's

Real Estate Tax Letter

December 6, 2010

© 2010 by Michael C. Gray
ISSN 1930-0387

A monthly report focusing on tax issues for the homeowner and real estate investor.

Table of Contents

Happy Holidays!

Hanukkah is December 1 – 9 for 2010. Christmas falls on a Saturday this year. I tried to warn you the year is ending fast!

Hope you enjoy celebrating the holidays and that your holidays are happy and safe.

God bless us every one!

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The home stretch for year-end planning (and when we’re closed during December).

There is precious little time left for year-end planning.

Dawn Siemer is taking the last week of the year off to be with her family, leaving me to fend for myself.

The office will be closed on December 23 and 24.

If you want to schedule a planning conference, make it now! Call Dawn Siemer on Monday, Wednesday or Friday from 9 a.m. to 5 p.m. (before December 24) to make your appointment. Times available are limited.

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A Santa Cruz live luncheon seminar for tax professionals.

Michael Gray, CPA will give a live luncheon presentation for the Santa Cruz Discussion Group, Silicon Valley San Jose chapter of the California Society of Certified Public Accountants on Thursday, December 9 from 12:30 to 1:45 p.m. The topic is the IRS Disclosure and Use Rules. The luncheon will be at the Louden Nelson Community Center, 301 Center Street, Santa Cruz. The pre-registered investment is $20 for CalCPA members and $25 for nonmembers. For reservations, call Julie Jameson at 650-802-6221 or register online at www.calcpa.org.

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Holiday season half-price sale for books by Michael Gray, CPA.

Subscribers to our newsletters can buy any of Michael Gray, CPA’s books for half price until December 31, 2010. The books are Secrets of Tax Planning For Employee Stock Options, 2009 Edition (regular price $199.97, sale price $99.99), Real Estate Tax Handbook, 2008 Edition (regular price $49.97, sale price $24.99), and Employee Stock Options – Executive Tax Planning, 1998 Edition (Regular price $24.97, sale price $12.49). See the enclosed order form, or call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays and Fridays from 9 a.m. to 5 p.m. to order. You can find details about the books at www.employeestockoptionsecrets.com, www.realestatetaxhandbook.com, and http://tinyurl.com/execoptions.

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Year-end planning with uncertainty.

Congress’s inability to come to grips with the expiration of the Bush tax cuts leaves taxpayers with a dilemma. The promises of solving the procrastination of the last ten years during a one-month lame duck session don’t seem realistic. After a congenial meeting of President Obama with Congressional leaders on November 30, the Republicans are playing hardball, and saying they have no interest in compromise. They say no legislation will be passed until the Bush tax cuts are extended for all taxpayers.

Today’s headlines say, “Bipartisan Tax Deal Near.” Yogi Berra says, “It ain’t over ‘til it’s over!”

Meanwhile, we still don’t have an adjusted exemption for the alternative minimum tax. If Congress does nothing, taxpayers will have increased withholding for their first paychecks for 2011.

What should one do?

The only way to assure getting the current tax rates is to take income this year. Otherwise, gamble on extension of the Bush tax cuts.

That means the usual year-end income deferral and deductions acceleration are out the window.

Consider taking long-term capital gains in 2010. Note the wash sale rules that apply for losses don’t apply for gains. So, you can sell a stock, take the gain, and buy the stock back without losing your tax result.

If you have an installment sale during 2010, consider electing out and reporting the income for 2010 instead of as collections are made.

If you had an installment sale for a previous year, try to collect as much principal as possible during 2010.

Some individuals “harvested” capital losses for depreciated stock in 2009. Remember those loss carryovers will reduce taxable income from capital gains for investments sold during 2010.

Consider accelerating ordinary income to 2010. Cash basis taxpayers can collect retainers or send early billings.

When planning for deductions, consider the alternative minimum tax. State tax deductions, property taxes, and miscellaneous itemized deductions aren’t allowed for the alternative minimum tax.

The American Opportunity Tax Credit, is scheduled to expire after 2010. It may be advantageous to prepay 2011 education expenses by December 31, 2010 so that you can claim the credit on your 2010 federal income tax return.

If you want to get a charitable contribution for 2010, consider paying for it with your credit card. The donation is deductible on the credit card transaction date.

Consider the ability to convert a regular IRA or 401(k) account to a Roth account for 2010. Instead of deferring the income to 2011 and 2012, consider electing to have all of the income taxed in 2010 (if you can afford it).

Does your S corporation still have accumulated C corporation earnings and profits? Get them paid out at bargain rates before the year end. The federal tax rate for qualified corporate dividends is scheduled to increase from 15% to 39.6%.

If your corporation has the cash, consider paying a dividend before the year end to take advantage of the current 15% federal tax rate.

If your corporation doesn’t have cash but you can afford to pay the income taxes, consider making a consent dividend from a C corporation. You can receive additional tax basis (investment) in the corporation at the expense of paying a 15% tax instead of a 39.6% tax.

Tax-deferred exchanges aren’t as advantageous when the long-term capital gains rate is 15% versus a future 20%. Remember you can’t “elect out” of an exchange. The transaction qualifies or it doesn’t.

Purchases of over-the counter drugs will no longer be deductible for employee flexible-spending arrangements (cafeteria plans) after December 31, 2010. Stock up on aspirin before January 1, 2011!

The nonrefundable 30% credit (up to $1,500) for qualified energy efficiency improvements to an existing home during 2009 and 2010 is scheduled to expire after 2010. This may be your last chance to get the tax credit for installing insulated windows or a more efficient furnace or air conditioner.

If you have an IRA and you are over 70 ½, remember to take your required minimum distribution by December 31 (April 30 of next year if you reached age 70 ½ during 2011). Individuals with inherited retirement accounts or who are taking distributions as a series of substantially equal payments also must take required distributions by December 31.

Remember the federal gift tax rate for 2010 is 35% (after the $1 million lifetime exemption) and that the generation-skipping tax is repealed for 2010. Now may be the time for making direct gifts to grandchildren. Also remember there is a $13,000 annual exclusion per donee, per donor for present interest gifts.

Businesses can take advantage of the extension of 50% bonus depreciation and higher expense (up to $500,000!) election available for 2010 by making year-end purchases of depreciable assets. Remember, the asset must be in service before the end of the year to qualify for depreciation.

This list is incomplete. Consider meeting with a tax advisor to review your situation. (That’s our business! Call Dawn Siemer at 408-918-3162 Mondays, Wednesdays and Fridays before December 24 from 9 a.m. to 5 p.m. to make an appointment.)

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Last chance to adjust withholding for 2010.

If you have enough control over your payroll, review your 2010 withholding. Unlike estimated tax payments, withholding is consider paid evenly during the year, even when most of it is paid at the year-end. You can avoid penalties for underpayment of estimated tax by “catching up” on underwithholding in December.

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Reminder about electronic payments required during 2011.

Almost all employers will have to make federal tax deposits, including payroll tax deposits, using the Electronic Federal Tax Payment System (EFTPS) starting January 1, 2011. If you aren’t already set up, do it now because it takes a little time.

California has been waiving penalties for high income taxpayers who haven’t made their estimated tax payments at the Franchise Tax Board Web Site, www.ftb.ca.gov. Electronic payments are required once a person (a) makes an estimated tax or extension payment over $20,000, or (b) files an original tax return with a tax liability over $80,000. The 1% penalty will no longer be waived effective with the January 15, 2011 installment. Once you do it, you’ll wonder what the fuss was about. If you need help, your tax return preparer can get you started (for a fee).

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Are you prepared to issue information returns?

Starting for 2010, real estate rental is treated as a “trade or business” for purposes of the information reporting requirements. That means owners of rental real estate are required to issue Forms 1099 for payments to noncorporate payees of more than $600 for rent or fees (such as to a tax return preparer). Payments to lawyers of more than $600, whether they are incorporated or not, are required to be reported. You can request that the payee provide their tax identification number using Form W-9.

The 2010 information returns should be mailed to the payees by January 31, 2011 and submitted to the IRS by February 28, 2011.

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Charitable deduction denied for house to be demolished.

Taxpayers donated a lakefront house to a local fire department to be burned to the ground in a training exercise. The taxpayers originally claimed a $76,000 tax deduction based on an appraisal using the “before and after” method of valuation. The taxpayers later amended their tax return and claimed a $235,350 tax deduction, based on the reproduction cost of the home.

The IRS denied the deduction, stating the cost to demolish the house, estimated at $10,000, exceeded the value of the residence.

The Tax Court found for the IRS. Since the taxpayers planned to demolish the home anyway and conditioned the donation on the demolition, there was no significant value and the taxpayers received the benefit of the demolition to clear the property. Evidently the taxpayers were not cooperative in providing access to the property by the IRS, which also inclined the Tax Court to rule against them.

(In retrospect, the taxpayers were victims of their own greed. If they hadn’t amended their tax returns, this issue probably wouldn’t have been examined.)

(Rolfs v. Commissioner, 135 TC No. 24.)

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Rental losses disallowed to real estate prfessional who failed material participation.

The Tax Court upheld the IRS in disallowing passive activity losses from rental real estate for a taxpayer who qualified as a real estate professional because she was a real estate broker and real estate loan agent. The Tax Court said her real estate rental activities reported on Schedule E were separate from her real estate brokerage and loan business reported on Schedule C. Therefore, she had to prove she met the material participation test for the properties under the passive activity loss rules, which she conceded she was unable to do.

(Perez v. Commissioner, T.C. Memo 2010-232.)

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Financial Insider Weekly broadcast schedule for December and January.

Financial Insider Weekly is broadcast in San Jose and Campbell on Wednesdays at 7:00 p.m., Pacific Time. You can watch it on Comcast channel 15 for San Jose and Campbell. 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 1, Michael Desmarais, Attorney, “Your rights as a beneficiary of an estate or trust”
December 8, Robert Temmerman, Jr., Attorney, Temmerman, Cilley & Kolmann, “I’m an executor. Now what?”
December 15, Robert Temmerman, Jr., Attorney, Temmerman, Cilley & Kolmann, “I’m a trustee. Now what?”
December 22, James Brown, ASA, CFP®, Perisho, Tombor, Ramirez, Filler & Brown PC, “The Role of the Business Valuation Specialist”
December 29, Frank Doyle, Attorney, WealthPLAN, “Estate Planning Using Family Limited Partnerships”
January 5, David Beck, CFP®, Bay Area Planners, “Budgeting and Student Positioning for a College Education”
January 12, David Beck, CFP®, Bay Area Planners, “Financial Aid and Tax Planning for a College Education”
January 19, Kathleen Wright, Attorney, American Red Cross, “Preparing Your Finances For A Disaster”
January 26, Naomi Comfort, Attorney, Hawks & Comfort, LLP, “Health Care Reform Update”

Financial Insider Weekly is also broadcast as follows:

  • Sunday at 5 p.m. on Comcast channel 28 in Hayward, Alameda and Fremont and on AT&T U-Verse Channel 99, Hayward public access TV 28 in California
  • Monday at 7:30 p.m. on Comcast channel 15 in Saratoga
  • Thursday at 5:30 p.m. on Comcast channel 27 in Santa Cruz County and Charter Communications channel 73 in Capitola and Watsonville
  • Thursday at 7 p.m. on Comcast channel 26 and AT&T U-verse channel 99 in Marin County
  • Thursday at 10 p.m. on Comcast channel 28 in Hayward, Alameda and Fremont and on AT&T U-Verse Channel 99, Hayward public access TV 28 in California
  • Friday at 4 p.m. on cable channel 15 in Cupertino, Los Altos and Mountain View
  • Friday at 4:30 p.m. on Comcast channel 15 in Los Gatos
  • Friday at 6:00 p.m. on Comcast and Astound channel 29 in San Francisco. Online streaming video at www.bavc.org, "public access TV".

Past episodes of Financial Insider Weekly are posted on YouTube. One 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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Questions and Answers

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, Facebook and LinkedIn!

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.

You can also follow me on other social media sites, Facebook and LinkedIn.

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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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Check out my blog.

I have also started a blog at www.michaelgraycpa.com. Check it out!

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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.

 

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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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