Michael Gray, CPA's
Real Estate Tax Letter
September 14, 2011
© 2011 by Michael C. Gray
ISSN 1930-0387
A monthly report focusing on tax issues for the homeowner and real estate investor.
Table of Contents
- Where have we been?
- The year is two-thirds over!
- The next estimated tax payment for individuals is due September 15.
- Extended calendar year returns, except individuals, are due September 15.
- Extended income tax returns for individuals are due October 17.
- Estates of 2010 decedents should consider extension.
- September 17 is disclaimer deadline for 2010 estates.
- September 30 is a key date for inherited retirement accounts.
- Do you need help with finishing extended income tax returns, preparing amended income tax returns, or tax audits?
- Standard mileage rate increases.
- Broad California tax withholding requirement for property managers.
- Guidance issued about carryover basis for 2010 decedents, but still no form.
- Costs incurred before business started weren't deductible.
- Out of state LLCs with California managing member probably subject to California LLC tax.
- Donation deduction lost for lack of document.
- Deduction of mortgage interest on boyfriend's mortgage disallowed.
- Charitable deductions upheld for façade easement.
- California taxes gain from out of state business when proceeds are received by a resident.
- Financial Insider Weekly now broadcast in Morgan Hill.
- Financial Insider Weekly broadcast schedule.
- Questions and Answers
- Follow me on Twitter, Facebook and LinkedIn!
- Do you know about our other newsletters?
- Check out my blog.
- Subscribe/Remove from Michael Gray, CPA's Real Estate Tax Letter
- IRS Circular 230 Disclosure
Where have we been?
Janet and I left July 28 for a Princess Cruise in the Greek Isles and returned August 15. Dawn, John and Kara took their vacation at Yosemite and other California destinations from August 27 and returned to work September 7. Meanwhile, I have been churning through projects. So, this newsletter has been on the back burner.
It’s good to be back!
The year is two-thirds over!
It happens every year. Before we know it, another year is coming to a close. Labor Day is past. September 23 is the first day of Autumn. Most of the children are back in school. Before we know it, Halloween, Thanksgiving and Christmas will be here. It’s time to start thinking about year-end tax planning. To make an appointment, call Dawn Siemer at 408-918-3162 on a Monday, Wednesday or Friday.
The next estimated tax payment for individuals is due September 15.
Remember that California has "front loaded" the first two estimated tax payments and there is no September estimated tax payment for California. If you are paying your estimated tax payments based on your actual income and deductions for this year, be prepared to assemble your information for the September estimated tax computations.
Extended calendar year returns, except individuals, are due September 15.
The extended due date for 2010 income tax returns of calendar year corporations, S corporations, partnerships, estates and trusts is September 15, 2011. Hope yours is already done!
Extended income tax returns for individuals are due October 17.
The extended due date for 2010 individual income tax returns is October 17, 2011. (October 15 falls on a Saturday.) We can still take two more new clients for preparing their 2010 individual income tax returns. To make an appointment, call Dawn Siemer on a Monday, Wednesday or Friday at 408-918-3162.
Estates of 2010 decedents should consider extension.
The due date for federal estate tax returns of decedents who died from January 1 to December 17, 2010 is September 17, 2011. (See below for those who elect carryover basis, instead.) The IRS hasn’t issued Form 706 for 2010 decedents yet! These estates should probably request a six-month extension of time to file, which would make Form 706 due March 17, 2012.
The due date for decedents who died after December 17, 2010 is nine months after death. These estates are also eligible to file for extensions to time to file their federal estate tax returns.
September 17 is disclaimer deadline for 2010 estates.
One of the most powerful estate planning tools after a death is the disclaimer. It simply means, "I won’t take it." For example, a surviving spouse can disclaim inherited property from the predeceased spouse and let his or her children receive the property instead. This is significant because property inherited from a spouse usually isn’t subject to estate tax, but property inherited from a parent is. Using a disclaimer can help to use the maximum estate tax exemption, which was $5 million for 2010.
Since the exemption for 2010 wasn’t determined until December 17, 2010, Congress extended the time to make a qualified disclaimer for 2010 deaths until September 17, 2011.
If you think you could benefit from such an election, see your attorney now.
September 30 is a key date for inherited retirement accounts.
Sometimes beneficiary designations for retirement accounts, including Roths and IRAs, can result in the benefits having to be distributed over a short time, such as when a charity is a beneficiary in addition to other individuals. Also, some beneficiaries will have shorter life expectancies than others.
These issues can be eliminated by paying out the share of the non-qualified beneficiaries and dividing the account into separate shares for the individual beneficiaries by September 30 of the year after the year of death of the account owner.
The executor technically isn’t responsible for administering most retirement accounts, so inherited accounts may not receive the attention they deserve and these actions are easily missed.
If you think you may have been a beneficiary for a retirement account of an account owner who died during 2010 and could benefit from taking these actions, consult with a tax advisor now.
Do you need help with finishing extended income tax returns, preparing amended income tax returns, or tax audits?
We are now focusing on finishing extended income tax returns. Some of our readers have found errors in or are uncomfortable with tax returns that they prepared using tax software or were prepared by other tax return preparation companies. We can provide a second opinion. Others have received notices for tax audits and sometimes can’t get the help they need from their tax return preparer. We can help with all of these. To make an appointment, call Dawn Siemer on a Monday, Wednesday or Friday at 408-918-3162 from 9 a.m. to 5 p.m.
Standard mileage rate increases.
The standard mileage rate used for business expense deductions when vehicle expenses aren’t itemized has increased from 51¢ per mile to 55.5¢ per mile, effective July 1, 2011. The mileage rate for medical deductions has also increased from 19¢ to 23.5¢ per mile.
(IR 2011-69; Ann. 2011-40, 2011-29 IRB.)
Broad California tax withholding requirement for property managers of certain nonresident landlords.
Payees of rent to nonresident landlords are required to withhold California income taxes when remitting those payments. The payments are remitted and reported using the Franchise Tax Board’s Form 592 series of forms.
The withholding rate is generally 7% of gross rents.
Property managers/withholding agents must withhold on rents paid if:
- The property owner is a California resident;
- The property is located in California;
- Gross rents (less the property manager fee) are $1,500 or more per year; and
- The property manager has not received Form 588 or 589 from the Franchise Tax Board stating that no withholding is required.
Spidell Publishing has been communicating with the Franchise Tax Board about specific scenarios, and found the reporting requirements are very broad for property managers. Examples of those who are considered withholding agents include:
- Property managers who are licensed real estate brokers
- Property managers who aren’t licensed real estate brokers
- Resident managers, unless the manager is an employee of the landlord
- A family member who collects rent payments
The withholding requirement applies even when the check is made to the landlord! How will the "withholding agent" get the funds to make the payment?
The withholding is only required for nonresident property owners who fail to file California income tax returns. If the owner is filing its returns, it should apply for a withholding waiver request using FTB Form 588, which should be granted. Reduced withholding can be requested using FTB Form 589.
According to a response to Spidell Publishing by the Franchise Tax Board, Form 589 must be submitted for each property and each withholding agent. Form 588 may be submitted with a list of withholding agents. The requestor must forward the waiver approval to all withholding agents.
These forms should be filed annually. You can get FTB forms at www.ftb.ca.gov.
("Property managers large and small must withhold", Spidell’s California Taxletter, September 1, 2011. "Property managers must withhold on nonresident landlord’s rents", Spidell’s California Taxletter, May 1, 2011.)
Guidance issued about carryover basis for 2010 decedents, but still no form.
The IRS has issued guidance about the time and manner to elect carryover basis for the estates of decedents who died during 2010. These are a few very valuable estates that elect to treat the estate tax as repealed for 2010.
According to the guidance, the election and allocation of carryover basis adjustments are to be done by Filing Form 8939 by November 15, 2011. The IRS hasn’t issued the form yet!
Previously the IRS said the form wouldn’t be due until 90 days after the final form was released.
Since these clients tend to be concentrated in a few law and CPA firms, there are some very grumpy practitioners in those firms.
An issue is, if the deadline is further extended, the forms could be due during tax season. Not a happy situation.
(IR-2011-83, Notice 2011-66, Rev. Proc 2011-41.)
Costs incurred before business started weren't deductible.
A taxpayer incurred $21,490 of expenses for training classes, plus additional expenses for investigating various properties for his real estate investment and rental business before he purchased a property on December 30 of a tax year. He didn’t rent the property or hold it out for rental until the next year. He tried to deduct all of his expenses on Schedule C.
The U.S. Court of Appeals for the District of Columbia upheld the IRS in disallowing the deduction of these expenses, because he wasn’t actively engaged in the real estate investment and rental business at any time during the year. A taxpayer is not carrying on a trade or business until the business is functioning as a going concern and performing the activities for which it was organized.
The best that he could hope for was to amortize the expenses as start-up expenses.
This is a common issue for people who start investing in real estate. They may go to classes for years before they buy a property. Their expenses usually won’t be tax deductible.
(Woody v. Commissioner, CA-DC, 2011-2 USTC ¶ 50,555.)
Out of state LLCs with California managing member probably subject to California LLC tax.
An out of state LLC with real estate located in another state is generally subject to Caliornia’s LLC tax if one or more managing members are California residents. If a nonmanaging member is "doing business" on behalf of the LLC, the LLC is also required to register and file an income tax return.
An LLC was formed in Delaware and held Texas real estate. The sole member (owner) of the LLC was a California resident. The LLC was unable to show the member traveled outside California and its business was solely conducted outside California, so it was held to be subject to California tax. (The tax return was also prepared by a California tax professional.)
(Appeal of Legend Plus Enterprise, LLC, Cal. St. Bd. Of Equal. Case No. 306061, February 22, 2011. "Out-of-State LLCs with California managing members", Spidell’s California Taxletter, August 1, 2011.)
Donation deduction lost for lack of document.
In order to claim a charitable contribution of $250 or more, the taxpayer must have a contemporaneous written acknowledgement of the gift.
A husband and wife donated an easement with a value of $1,870,000 under a legal settlement agreement with the county in which the property was located. They claimed a charitable contribution deduction for the easement.
The IRS denied the deduction because the taxpayers didn’t have a contemporaneous written acknowledgment of the gift, as specified in the Internal Revenue Code and Treasury Regulations.
The taxpayers responded the written settlement agreement should satisfy the requirement.
In a summary judgment, the Tax Court ruled in favor of the IRS that the settlement agreement didn’t satisfy the requirement, so the deduction was denied.
The moral is: when claiming a charitable contribution, especially for property, you really have to pay attention to the details of the requirements to document your deduction, or it will probably be denied.
(DiDonato v. Commissioner, T.C. Memo 2011-153, 101 T.C.M. 1739, June 29, 2011.)
Deduction of mortgage interest on boyfriend’s mortgage disallowed.
The title and mortgage of the residence of an unmarried couple was in the name of the boyfriend. The couple had a child. The boyfriend was a stay-at-home dad and the girlfriend was the breadwinner.
The girlfriend paid the mortgage and claimed the interest deduction.
The Tax Court upheld the IRS in finding the deduction was disallowed, because it wasn’t the debt of the girlfriend and she didn’t own the home.
(The couple later changed the title for the home and added the girlfriend as a debtor on the mortgage, which should have solved the problem. Another alternative? Get married!)
(Wheeler v. Commissioiner, T.C. Summary Opinion 2011-83, July 6, 2011.)
Charitable deductions upheld for façade easement.
A taxpayer claimed a tax deduction for conservation easements on the façades of two buildings located in a historic district. The IRS tried to deny the deductions by claiming the right of the historic preservation trust to abandon the easement violated the requirement that the rights be granted in perpetuity. The IRS also said the appraisal of the rights was deficient.
The U.S. Court of Appeals for the District of Columbia Circuit upheld the Tax Court in ruling in favor of the taxpayer. The IRS failed to show that the organization that held and monitored easements had ever abandoned its right to enforce a conservation easement. If it did, the rights would go to another historic preservation trust.
The Court also upheld the Tax Court in finding the appraisals sufficiently identified the method and basis for the valuations.
(Simmons v. Commissioner, CA-DC, 2011-1 USTC ¶ 50,469.)
California taxes gain from out of state business when proceeds are received by a resident.
A taxpayer sold a business located in Washington state in 2004. She then moved to California during 2005 and reported installment sale income from the sale of the business on her 2006 Federal income tax return, but excluded the income from her California income tax return as Washington-source income.
The California State Board of Equalization upheld the Franchise Tax Board in finding the gain was taxable in California. Since she was a resident of California, she was taxable on her worldwide income.
(Appeal of Sara K. Crossett, Cal. St. Bd. Of Equal. Case No. 516193, May 25, 2011.)
Financial Insider Weekly now broadcast in Morgan Hill.
Morgan Hill cable subscribers can now watch Financial Insider Weekly on MHAT, cable channel 19 on Mondays and Tuesdays at 4 p.m. and 7 p.m. Pacific Time. The program will be simultaneously broadcast on the internet as streaming video at www.mhat.tv. Tell your friends!
Financial Insider Weekly broadcast schedule for September and October.
Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 8:00 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 the rest of September and October:
- September 16, Scott Haislet, attorney and CPA, "Irrevocable life insurance trusts"
- September 23, Peggy Martin, CLU, ChFC, MSFS of The Family Wealth Consulting Group, "The role of life insurance in estate and financial planning"
- September 30, Stanlley Zlotoff, attorney, "Bankruptcy for individuals"
- October 7, John Olagues, Truth In Options, "Employee Stock Option Basics"
- October 14, John Olagues, Truth In Options, "Employee Stock Option Hedging Strategies"
- October 21, Mark Erickson, attorney, "Divorce – California Style: Basics"
- October 28, Mark Erickson, attorney, "Divorce – California Style: Spousal Support"
Financial Insider Weekly is also broadcast as follows:
- Sunday at 5:30 a.m. on Comcast Channel 27 in Santa Cruz County and on Charter Communications Channel 73 in Watsonville and Capitola.
- 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 3:30 p.m.on Comcast Channel 27 in Santa Cruz County and on Charter Communications Channel 73 in Watsonville and Capitola.
- Monday at 4 p.m. and 7 p.m. Pacific Time on cable channel 19 in Morgan Hill. Broadcast on the internet at the same time as streaming video at www.mhat.tv.
- Monday at 7:30 p.m. on Comcast channel 15 in Saratoga.
- Tuesday at 4 p.m. and 7 p.m. Pacific Time on cable channel 19 in Morgan Hill. Broadcast on the internet at the same time as streaming video at www.mhat.tv.
- Tuesday at 9:00 p.m. on Comcast channel 26 and AT&T U-verse channel 99 in Marin County.
- 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 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".
- Saturdays at 12:30 p.m. on Comcast channel 27 in Santa Cruz County and on Charter Communications Channel 73 in Watsonville and Capitola.
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!
Questions and Answers
Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter. Write mgray@taxtrimmers.com.
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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