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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.

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.

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

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