Unmarried Co-Owners of Residence with > $1 Million Mortgage

Home mortgage interest is only deductible on up to $1 million of debt used to buy or improve a taxpayer’s primary residence. If two unmarried persons are co-owners of a home they both use as their primary residence, the question arises as to whether each owner has a separate $1 million limit. The IRS recently took the position (no surprise) that the $1 million limit applies per property, not per taxpayer. Therefore, the $1 million has to be split among the owners based on their percentages of ownership. IRS office of Chief Counsel Internal Legal Memorandum 200911007.

S-Corporation Built-In Gains Period Now 7 Years

The new stimulus law, the American Recovery and Reinvestment Act of 2009, signed into law by President Obama on Feb. 17, temporarily reduced the S-Corporation built-in gains period from 10 to 7 years. For tax years 2009 and 2010, S-corporations can avoid C-corporation maximum-rate income tax on built-in gains. Built-in gains are generally gains that were unrealized at time of conversion from C-corporation to S-corporation. Generally these gains are subject to the maximum C-corporation tax rate if realized (the property is sold) by the S-corporation within 10 years of S-election.

Employee-Shareholder Reasonable Compensation

In addressing the issue of employee-shareholder reasonable compensation in the Menard Inc. tax court case, the Court of Appeals for the Seventh Circuit rejected the Tax Court's multi-factor approach in favor a single “independent investor” test. Under the independent investor test, if a hypothetical independent investor would consider the rate of return on his investment to be far higher than he had any reason to expect, the compensation paid is presumptively reasonable [regarding whether the compensation is unreasonably high, in the case of a C-corporation]. However, the presumption may be rebutted by evidence that the company's success was the result of extraneous factors, such as an unexpected discovery of oil under the company's land, or that the company intended to pay the owner/employee a disguised dividend rather than salary. Menard Inc. v Commissioner (CA 7 3/10/2009).

California Releases Tax Refunds

California State Controller announced he has begun releasing more than $2.8 billion in payments that he was forced to delay in February, due to the state's cash shortage. Both personal and corporate tax refunds have now resumed.

Who Really Pays Income Tax

According to the IRS Winter 2009 Statistics of Income Bulletin, taxpayers in the top 1% of Adjusted Gross Income (AGI) reported AGI of at least $388,806. This group accounted for 40% of the total income tax reported, compared to 39% in 2005. Taxpayers in the top 5% of AGI reported AGI of at least $153,542 and this group accounted for 60% of total income tax.

California Real Estate Agent is a Qualifying Real Estate Professional

The IRS argued that a rental property owner who held a California real estate agent’s license, but not a California real estate broker’s license, was not engaged in the real estate brokerage trade or business. The IRS said that the agent was not a qualifying real estate professional entitled to the exception from the passive activity loss rules that generally apply to rental real estate losses, and disallowed the loss deductions on the agent’s tax returns. This is completely contrary to the way that this issue has been handled for many years by taxpayer, CPA’s, and the IRS. In the Tax Court case Agarwal, TC Summary Opinion 2009-29, the Tax Court summarily slapped down the IRS for this nonsense and determined that the taxpayer didn't even have to be licensed as a real estate agent, let alone a broker, to be treated as engaged in the real estate brokerage trade or business and eligible for the qualifying real estate professional exception to the passive activity loss rules on rental real estate.

Energy Efficient Home Improvements Tax Credit

The new stimulus law, the American Recovery and Reinvestment Act of 2009, signed into law by President Obama on Feb. 17, provides homeowners more tax credits for energy efficient home improvements. Previously, the credit was 10% with a lifetime maximum of $500 and ended after 2009. Now a credit can be claimed on 2009 and 2010 purchases and the maximum is $1,500 for 2009 and 2010 combined.

California Homebuyer’s Credit

California taxpayers who purchase a new home (new construction) March 1, 2009 through February 28, 2010 and use it as their primary residence for the following two years can get a tax credit of 5% of the purchase price (maximum $10,000). 1/3 of the credit is claimed in the year of purchase and each of the two succeeding years. To apply for the credit, the escrow person, on behalf of the seller and buyer, must fax the completed Form 3528-A, Application for New Home Credit, to the FTB , within seven calendar days after the close of escrow. Only the first $100 million of valid credit applications will be approved. (FTB—Tax Credit for New Home Purchase, 02/27/200).