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June 4, 2012

Community Property with Right of Survivorship

Filed under: Estate Planning,Real Estate,Taxes — Barry @ 1:37 pm

Effective July 1, 2001, California Civil Code section 682.1 was amended to allow a new type of property ownership: Community Property with Right of Survivorship.

Holding title in real property as Community Property has been a “double step-up in basis” on the death of a spouse. The major problem of Community Property is that it doesn’t transfer full ownership to the surviving spouse when the first spouse dies.  Before 2001, many married couples were advised by their realtor to hold title to property as Joint Tenants.  Unfortunately this may not be advantageous because they do not understand how the step-up in basis works.

Assume that Daniel and Harriet  and Harriet bought a home in 1975. 5 years later they moved out, converting it into a rental. Daniel manages the property; Harriet hates dealing with it. Many years later the rental property has been depreciated down to very little. More importantly, the value has risen to unbelievable levels.

Let’s assume that Daniel and Harriet bought the property for $40,000, and depreciated it down so the basis is $20,000. It now sells for $350,000 (after commission and costs of sale).

This scenario has three possible outcomes depending on when it is sold and how title was held.

  1. The Bad Outcome
    Daniel gets sick; while he is on his deathbed Harriet sells it before Daniel dies. The profit, $350,000 – $20,000 = $330,000 is taxable.
  2. The Good Outcome
    Daniel dies; Harriet sells it even before the body is cold. Believe it or not, the amount of taxable profit depends on how title was held!

Joint Tenants: The basis in inherited property is stepped-up to the date of death value. Harriet “inherited” ½ from Daniel; she already owned her half.

Harriet’s basis was $10,000 (½ of $20,000). It stays the same. She already owned it and did not inherit it.
Daniel’s ½ (now owned by Harriet) is stepped-up to $175,000.
Harriet’s basis is now $185,000.

When she sells for $350,000, only $165,000 is taxable.

  1. The Best Ending
    Community Property: Federal tax law states that the basis of 100% of Community Property is stepped-up to the date of death value.

Harriet’s basis is now $350,000.

When she sells for $350,000, nothing is taxable.

Community Property with Right of Survivorship.
The law effective 7/1/01 allows the best of both worlds.  It provides the simplicity of Joint Tenancy while providing the tax benefit of Community Property by the creation of Community Property with Right of Survivorship.

For simplicity we have assumed that Harriet will sell instantly on Daniel’s death. In the alternative, she may hold the property as a rental and enjoy the greater depreciation that applies after the step-up in basis.

A Preliminary Change of Ownership Report must accompany the Deed to the local Recorder’s Office.  Check Box A to report that this Deed is a spousal transfer, exempt from property tax re-assessment as an exempt transfer under Proposition 13.

Note:  A Living Trust is a better tool than the Community Property with Right of Survivorship.

September 15, 2010

I Owe the IRS Taxes… Can I make payments? What if I’m in Bankruptcy?

Filed under: Bankruptcy,Chapter 7 Bankruptcy,Taxes — Barry @ 8:08 am

Your problem is not unusual. Whether you call it an installment agreement, payment agreement, payment option or a payment plan, the idea is the same — you make payments on the taxes you owe. While that may sound like a good idea, you can save money by paying the full amount you owe as quickly as possible to reduce the interest and penalties you will be charged. Those who cannot clear up their tax debts immediately may find that an installment agreement allows for a reasonable payment option. Installment agreements allow the taxpayer to make smaller, more manageable payments while still paying the tax in full.
Under normal circumstances, (i.e., you are not in bankruptcy) you will need to determine whether you owe more than $25,000 including taxes, penalty and interest. If you owe less than that amount you Online Payment Agreement (OPA) or call the number on the bill or notice (have the bill or notice available, along with the social security number). A fill-in Request for Installment Agreement, Form 9465 (PDF), is also available online and can be mailed to the address on the bill.
If you owe more than $25,000 you will need to file a Collection Information Statement, Form 433F with the IRS. If you are in this situation you may wish to speak to a professional.
Bankruptcy
If you are in bankruptcy you need to communicate with the IRS. You should not file the Form 9465, but should contact the IRS at 1-800-829-1040 to obtain the phone number for your local bankruptcy insolvency unit. You may also want to consider filing an Offer in Compromise. (More on offers in compromise will be covered in another post.) Again, if you are in bankruptcy and cannot pay your taxes, you need to communicate with the IRS or have your attorney do this for you.

June 24, 2010

Consumer FDCPA Lawsuits up againt Creditors

Filed under: Bankruptcy,Credit,Credit Reports,Creditor,Debts,FDCPA — Barry @ 7:43 am

It is estimated that 541 different collection agencies and creditors have been named in over 500 consumer statute lawsuits filed nationwide in the first half of June.   These numbers were pulled from data from U.S. District Court complaint dockets.   More consumers are fighting back as credit gets tighter and collection agencies especially buyers of junk debt get more even more aggressive.  http://bit.ly/9jobrM

May 30, 2010

IRS wants share of on Ebay and Craigslist businesses

Filed under: Taxes — Barry @ 8:58 pm

In 2009, $60 billion worth of items were sold on eBay (thank you Meg Whitman).  This means that many sellers earned extra money; their activities should have caused them to earn taxable income. The Washington Post has reported that beginning in 2011, a new law will require “the gross amount of payment card (credit card) and third-party network (PayPal) transactions to be reported annually to participating merchants and the IRS.”

Additionally, for 2011 tax returns, taxpayers who sell more than $20,000 worth of goods annually, and have more than 200 electronic transactions will receive a new IRS form, known as 1099-K, for reporting the proceeds. These new tax rules should not be an issue for people who sell just a few small items online for less than they paid for them; the IRS notes that taxpayers generally do not have to report income from auctions that resemble a garage or yard sale. However, if your small “online garage sale” turns into a business with recurring sales and purchases of items for resale, it may be considered an online auction business.

Remember, sales that result in gains are generally taxable transactions, “regardless of whether the taxpayer is conducting a business,” says Gil Charney, principal tax researcher at The Tax Institute at H&R Block. “The real reason behind the law is simple: Research shows taxpayers do a much better job of reporting taxable income when they know the IRS is receiving information about their transactions.”

The best advice that can be given is to KEEP GOOD RECORDS… records income, of cost of merchandise or services sold and of business expenses.   If you have a gain report it and if you have a loss… report that too.  You will generally report this income on Schedule C of your form 1040.

May 25, 2010

Priviledge between you, your CPA and your Attorney and the IRS

Filed under: Taxes — Barry @ 7:14 am

Many people believe that EVERYTHING THEY TELL an attorney is priviledged; that they can say anything and the lawyer may not and will not repeat it.    (No we are not priests in the confessional).   Often much of the communications between a client and their attorney is privildged… often it is not.  The question is very complex and you need to get clarification as to what is and is not and what maybe is not priviledged.

In a recent appeal to the United State Supreme Court, the Supreme Court  declined to hear the appeal of Textron ( a maker of private jets).  The company had appealed a ruling by the First Circuit Court in the case (see Textron Case Endangers Tax Workpaper Protection). The IRS had requested tax accrual workpapers from the corporate jet manufacturer, including a spreadsheet compiled by its attorneys showing potential items of contention with the IRS and its chances of winning them. The company asserted a work product privilege and won two rulings against the IRS, including by a three-judge panel at the First Circuit Court. But when the full “en banc” court heard the appeal, it ruled in the IRS’s favor. The Supreme Court let that decision stand on Monday. See, Supreme Court denies Textron Tax Workpaper Appeal.

Now most clients are not Textron (oh that they should be), but this has implications for everyone.

When it comes to you and your CPA, or you and your Tax attorney, you need to be very clear on what is and is not, and what may and may not be priviledged.  Telling your Tax attorney that you murdered your mother… priviledged.  Telling your Tax attorney that you also stole $3M from dear dead mom… probably not priviledged.  Working on tax avoidance strategies… maybe privileged.

Know the boundaries of what is and is not covered by privilege.

March 7, 2010

Everything I tell my Bankruptcy Attorney is Privileged, Right? 1

Filed under: Bankruptcy — Barry @ 7:09 am

The question of Attorney-Client Privilege is often asked by prospective clients thinking about filing bankruptcy.

There are several exceptions to privilege.  One of these is where the information is to be disclosed in a public document such as a bankruptcy petition.   In bankruptcy there is little privilege and perhaps even worse, little case law about what constitutes waiver of the attorney-client privilege.   An interesting article was recently published about a 2010 North  Carolina Bankruptcy Court decision, that further cut back on attorney-client privilege. http://bit.ly/cNhTOA

Luckily, this case is not binding on bankruptcy courts in California. You need to clarify with your bankruptcy attorney what will and will not be priviledged.

Usually, priviledged matters are matters which are not intended to be released for public consumption. The problem is that virtually anything you bring to your bankruptcy attorney, if it will end up in your bankruptcy petition is ultimately public. What does this mean for the average client? If you tell your bankruptcy attorney that you murdered your mother… this will in all liklihood be priviledged. But it will in all likelihood not be priviledged if you tell your bankruptcy attorney that you have $10,000 in an offshore bank account that you don’t want to disclose in your petition. Sure your attorney may not disclose this resulting in a crime for both the client and attorney. The best thing is to be honest and know the limits of where attorney-client priviledge begins and ends.

March 4, 2010

Can I discharge Personal Income Taxes in a Chapter 7 Bankruptcy?

Filed under: Bankruptcy — Barry @ 4:29 pm

In general, Personal Income Taxes1 may be discharged in Chapter 7 bankruptcy, IF, you meet five (5) requirements.

  1. The tax you seek to discharge must be from a tax year over three years old.  For instance, discharge your 2007, income taxes, they were due on or before April 15, 2008.  Therefore you cannot discharge your 2007 tax liability until after April 15, 2011.
  2. The tax return must have been filed more than two years before the bankruptcy.  If you filed your tax returns on October 15, 2008, you cannot discharge them in a Chapter 7 bankruptcy before October 16, 2010.
  3. The tax you seek to discharge must have been assessed for more than 240 days prior to filing for Chapter 7. You must add on top of this any period of time that an offer in compromise was pending, plus 30 days.  This means that if you wanted to file  bankruptcy on March 15, 2010, the tax must have been assessed on or before July 18, 2009.
    1. If the tax was assessed on June 30, 2009, but you filed an offer in compromise on July 1, 2009 and the taxing authority did not get back to you until October 1, 2009, you must wait until at least June 28, 2010 to file and get a chapter 7 discharge.
  4. The tax returns filed must not have been fraudulent.
  5. The purpose of not filing must not have been “a willfull attempt to evade or defeat the tax.”2

If you meet all five of these requirements you may get a discharge in Chapter 7.  If any one of the 5 requirements is not met, you may use either Chapter 13, or Chapter 11 to get a discharge.

1 The term Personal Income Taxes, does not include, corporate income taxes, employment taxes, sales taxes and other taxes that are not of a personal nature.

2 Morgan D. King, Esq. King’s Discharging Taxes under the Reform Act of 2005 (c) 2009

February 17, 2010

Tax – Technical Issues

Filed under: Taxes — Barry @ 11:46 am

Please note, that this post is intended for my colleagues who are tax attorneys.  If you are not a member of the California Bar and would like to submit through this office, please let me know, or else send your comments as indicated below.

Barry

Dear Members of the California Tax Procedure and Litigation Committee,

A big thanks to those who have provided the Committee Chair with their comments regarding the following topics requested by the U.S. Tax Court:

  • Innocent Spouse Trial Issues: the Tax Court is interested in whether, among other things, there is anything that could be done better or the status quo ante is acceptable;
  • Levy/CDP Cases: the Tax Court is interested in whether, inter alia, there is anything that could be done better or the status quo ante is acceptable;
  • The Tax Court wants our feedback on its new electronic filing, which is to be effective January 1, 2010: do we like it better than before and whether any attorneys are having any problems getting used to it, if so what are they, and if so, what are some proposed solutions for improvement and easier use (or is the new system perfect?);
  • With respect to litigation and suggestions for improvement by the Tax Court, the Tax Court is interested in any “technical issues and anomalies encountered by attorneys before, during, and after trial” (or if there are none); and,
  • The Tax Court is interested in a discussion of how the Tax Court Rules that have gone in effect in January of this year (e.g., limiting interrogatories to 25) should be implemented and applied in practice (or if these new rules have no need for improvement, etc.).

However, the Committee Chair still needs more comments to make our Committee’s contributions to the U.S. Tax Court meaningful. And the Committee Chair needs them before the end of February. Let’s use this opportunity to help improve our practice before the U.S. Tax Court.

Please send your comments via e-mail to Michael R.E. Sanders, Chair, at sanders@taxatty.com

Thank you for your support.

Mike

Your Credit Reports are Supposed to be Kept Confidential under Fair Credit Reporting Act

Filed under: Credit Reports — Barry @ 11:09 am

Gregory Navone of Las Vegas and the two mortgage brokerage companies he owned – First Interstate Mortgage Corp. and Nevada One Corp. – were charged in the FTC’s December 2008 complaint with improperly disposing of at least 230 credit reports and other “sensitive consumer records” collected by the firms. Navone did not immediately respond to a request for comment.

Just a short note today.  [This post was originally posted several weeks ago, but the website crashed].  Your credit reports (just like your medical records) and other financial records are supposed to be kept confidential.  What this means is that anything with identifiable information should be securely disposed of and should never be thrown in the trash.

A great big no-no is leaving your social security card number where it can be used by others for various reasons… Number 1, Identity Theft.

Apparantly, Gregory Navone of Las Vegas and the two mortgage brokerage companies he owned –  First Interstate Mortgage Corp. and Nevada One Corp. didn’t understand this or did not care.  They were charged by the FTC’s  with improperly disposing of at least 230 credit reports  and other “sensitive consumer records” collected by the firm.

They have agreed to pay a measily $35,000 for this violation.  This amounts to a little over $150 for each of the 230 records.   Do you think this is enough?

To read more check out:  http://bit.ly/5lvgWx

What Happens to my family if our home is foreclosed on…?

Filed under: Forecloseure,Mortgages — Barry @ 10:43 am

First, we need to look to federal law.  Sections 701 et, seq. of Public Law 111-22 (Protecting Tenants at Foreclosure Act of 2009) provides limited protection to “bona fide tenants” receive protection from immediate foreclosure if the owner of the residence is foreclosed on.  However, owners, their children, or their parents are not afforded protected from eviction.    [The protection of tenants will be discussed in a future post.]

We therefore need to look to state law, since federal law does not protect the owners, their children or their parents in the event of a foreclosure.

In general, California law does not protect an owner who becomes a tenant after the home has been foreclosed on whether by non-judicial or judicial foreclosure.

What this means is that the new owner must give a 3-day notice to quit before filing an unlawful detainer action.  It is to the foreclosed owner’s benefit to immediately on notice of the sale to contact the new owner (usually the bank) and try to negotiate a lease for the property or “cash for keys”.  REMEMBER YOU SHOULD ACT QUICKLY AS SOON AS YOU RECEIVE NOTICE THAT THE PROPERTY HAS BEEN SOLD.

Negotiating “cash for keys” can be beneficial for both parties. The new owner does not have to go to the time and expense of an unlawful detainer action and possibly the costs of an eviction.  The former owner gets some cash to pay for the costs of the move.  Since the new owner is giving cash only on possession, they can often avoid damage by disgruntled former owners.

The buyer of the home at foreclosure is only “required” to give you a “Three Day Notice to Quit” before they may file an unlawful detainer proceeding against you.  This does not mean that they will not give you more time or work with you to get you out of the property.  The cost (legal fees, and court costs) of filing an Unlawful Detainer action (in Los Angeles County run approximately $1,000.00.  If the owner will negotiate, they might pay this amount to you instead of the court and an attorney.  Further, the owner knows that you understand that just getting the court order does not get you out of your home.   Often the judge will try to get the parties to enter into an agreement to allow the tenant a certain period to move; this is usually entered as a stipulated judgment (a judgment that will only be entered if you do not live up to the agreement).

Once you have been served with an unlawful detainer action, you have only 5-days to file an answer.  The 2010 Los Angeles County court filing fee to file an answer depends on how much the owner says you owe.  It can range from $205 to $355, unless you qualify for a fee waiver.

After the court grants possession, the new owner must apply to the court for a “Writ of Execution.”  The writ of execution must be given to the sheriff to evict you; the new owner may not forcibly move you out. This means that the new owner cannot go in, change the locks and throw your possessions in the street or trash; only the Sherriff can evict you!   The sheriff must give you a 5-day notice before they can come in to forcibly remove you from the premises.   Some sheriff’s departments move quickly, some are very slow in proceeding with even posting the notice.  The minimum fee for the eviction is $125.  The former owner will be responsible for the costs of storage.

The following article from the May 24, 2009 Los Angeles Times discusses evictions in Los Angeles County.  http://articles.latimes.com/2009/may/24/local/me-ridealong24

It is always best to work out a mutually beneficial arrangement between the new owner and old owner, as opposed to going to court and being forcibly evicted.  A cash for keys agreement can give you as little or as much time to move as you and the new owner can agree.   An unlawful detainer action in court through forcible eviction can take as little as three weeks to as many as two to six months or more.

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