TaxMamas TaxQuips

Today TaxMama hears from David in the TaxQuips Forum, who defines a dealer in real estate as someone who sells a single property for profit, as long as the intent to act as a dealer to real estate is present.”

Dear David,

You tell us that IRC 453(l)(1)(B) defines a dealer disposition as:

Any disposition of real property which is held by the taxpayer for sale to customers in the ordinary course of the taxpayer’s trade or business

Are you right that one property would qualify?

Perhaps. Perhaps not. Here’s an interesting quote from an article by Cali Zimmerman for NuWire Investor:

Real estate dealer rules can get a bit murky. In fact, “[t]he problem is so severe that, according to the Fifth Circuit Court of Appeals, ‘if a client asks you in any but an extreme case whether, in your opinion, his sale will result in capital gain, your answer should probably be, ‘I don’t know and no one else in town can tell you’’ (J.D. Byram, CA-5, 83-1 USTC para. 9381, 705 F. 2d 1418),” according to The CPA Journal.

The distinction between investor, landlord and dealer is important.

• As an investor, all the expenses are capitalized. The gains are capital gains.


• As a landlord, fixing up a property to rent out, the rental income is passive. The gains are capital gains, except for the depreciation.


• As a dealer, not only do you not get capital gains treatment, but the income and profit are self-employment income, subject to 15.3% self-employment taxes.

According to George Saenz in a BankRate.com article, issues to consider before condemning a transaction to dealerhood include

• Length of time the property is held.


• Number of sales


• Major improvements, like re-zoning and subdividing.


• The owner’s involvement in the sale of the property – are they handling it all themselves (or via their own paid staff), or are real estate agents and brokers involved?

Another issue to consider, that you have not, is the phrase “taxpayer’s trade or business”. Is flipping real estate their main occupation? Is this what they are living on? Probably not.

Generally, you can probably support investor or landlord status if this is not your main livelihood. Do the research properly and you will undoubtedly find case law to support your position if you’re only flipping one or two properties a year, while holding down a ‘day’ job.

And remember, you can find answers to all kinds of questions about real estate dealers, and other tax issues, free. Where? Where else? At www.TaxMama.com.

[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]

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Today TaxMama hears from Toni in the TaxQuips Forum, who tells us. “I’m doing my own partnership taxes and am confused about entering information. In 2009, I bought, fixed up and sold 2 properties. [and Toni adds lots of details. ] I’m confused because I’ve added the gain twice from Form 4797. What am I doing wrong?”

Dear Toni,

When you are doing a partnership tax return, you should be using tax software. Consider Turbo Tax Business and H&R Block Premium and Business . The tax software will flow the numbers from any form to all the correct places on the tax return. Some numbers flow to more than one form, for a variety of reasons. When preparing partnership returns, some numbers flow to page 1, Schedule K, Schedule L, Schedule M-1 and/or M-2, the K-1s and who knows where else. Unfortunately, this free TaxMama service is not designed to walk you through the line-by-line preparation of forms. Nor to review your tax return – a good review takes an hour or two.

Also, using Form 4797, there are several potential errors that most people make. Especially when it comes to the recapture of depreciation as ordinary income, computing basis, and how to deal with selling costs and fix-up expenses before sale.

Yes, some of the expenses might go on the Form 8825. Others should be part of basis. However, if these were never really rental properties, if they were properties you bought and fixed up to sell, you would have to capitalize all the expenses, not deduct them. This could be a grave error, with expenses that would be disallowed on audit. And David Toelkes brings up the issue that these properties might be considered inventory – which is an interesting point of view.

Another error is combining properties on one Form 8825. Why would you do that? These are two separate properties with distinct purchase and sale dates and escrows, aren’t they?

The more I think about the implications of the things you’ve written, the more potential errors I am seeing. And why is this a partnership? You keep saying “I”. Do other people own the properties with you? Frankly, if you have partners, YOU should not be preparing a partnership return yourself. It’s one thing to prepare your own tax return involving purchases, sales and fix up of real estate. You can accept the responsibility for any errors you might make. But if you have partners, are you sure you want to expose them to the errors you’re clearly making this tax return?

Your own personal liability as the preparer of this return could be extensive if it is audited and major errors are found. Your partners would hold you liable for their additional taxes, penalties and interest. Do you really want that?

If you can afford all this real estate, you can certainly afford to invest the few hundred dollars for a qualified, experienced tax preparer. Do it. I don’t want to see you getting into trouble.

And remember, you can find answers to all kinds of questions about real estate, and other tax issues, free. Where? Where else? At www.TaxMama.com.

[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]

Please post all Comments and Replies in the new TaxQuips Forum

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Today TaxMama hears from Jami from California in the TaxQuips Forum, who has this question. “My aunt left me her condo and I have to sell it. The deed passed to me a week after I turned 55. Will the 55 & over real estate rule apply to me when I file my tax return?”

Dear Jami,

Sorry to learn about your aunt dying. But how sweet of her to leave you her condo. It’s not clear to me what over 55 rule you’re talking about? Never mind.

Here’s how it works. You need to get an appraisal for the value of the condominium on the date of your aunt’s death. That will be your ‘basis’ or tax cost when you sell the condo. It’s possible that the executor of the estate has already done this. Please find out.

When you sell the condo, your gain will be based on the sales price, less selling costs, less the basis at date of death.

If you lived in the condo with your aunt for at least two full years out of the last five years, you will also be entitled to the $250,000 exclusion of profits since the condo was your personal residence. But you probably won’t need that. There won’t be a gain if you sell it in the same year your aunt died. The real estate market isn’t that strong in California these days.

If you didn’t live in it…try to sell the condo THIS YEAR. The capital gain rate for IRS may be as low as ZERO.

California doesn’t have any special rates. So your gain will be taxed at 9.3% or less, depending on your tax bracket. If there is a gain at all?

And remember, you can find answers to all kinds of questions about inherited assets, and other tax issues, free. Where? Where else? At www.TaxMama.com.

[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]

Please post all Comments and Replies in the new TaxQuips Forum

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www.TaxQuips.com

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TaxQuips Forum

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Today TaxMama hears from Karla in the TaxQuips Forum, with this question. “Is the loss on surrender of life insurance deductible on 1040?”

Dear Karla,

It’s not clear why you would have a loss when you surrender a life insurance policy. Of course, I don’t have much experience in this area.

Chapter 12 of IRS Publication 17 covers IRS rules about the

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Ask TaxMama

Where taxes are fun and answers are free

www.TaxQuips.com

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TaxQuips Forum

Where you can comment on this question

Dear Family,

THANK YOU.

Did I remember to tell you just how much I appreciate you – your friendship and support, your comments and even, sometimes, your silences? Well, THANK YOU.

We don’t always remember to show our gratitude or appreciation. So, many years ago, I created a holiday for this very purpose. (You’ll even find mentions of it online) Thanks for All the Gifts Week. Today’s Thank You letter will tell you all about how to use for your own benefit, too.
http://taxmama.com/asktaxmama/happy-thanks-for-all-the-gifts-week/

Last week I told about the new series of courses I am starting to teach with Tom Buck, CPA and Sonya Wilt, EA. We developed these courses in response to the many requests from people who are in tax trouble and need guidance. This is the first phase of the project – training more tax professionals to help you. You – and the Tax Pros can see a sample and overview of the new series by scrolling down to the bottom of this page and selecting “IRS Practice Series: Overview of Collection Issues” – price = $0!
http://www.cpelink.com/teamtaxmama

The second phase of the project is develop a resource where people in trouble can meet and help each other. Having kind of a hot-line for folks who’ve all faced horrible tax messes due to the nastiness of divorce, the new business quicksand of payroll taxes and taxes confusing beyond words, and just plain tax anxiety overload! Sonya, Eva and Tom (SET – hey, how do you like that acronym?) are going to provide complimentary resources for you, a place where you can congregate anonymously with others and compare notes and share ideas and successes – and there will be some inexpensive hands-on courses to help you fill out the forms yourself when you simply cannot afford to pay the thousands that tax professionals must charge you for the intense number of hours involved in collections defense. The graduates of the Tax Practice Series (above) will be able to help you – we’ll encourage them to donate some hours of Pro Bono guidance. There’s not much at the new site – but Tax Debt Anonymous coming this fall.
http://www.taxdebtanonymous.com/

Tax Holidays are ending, but there may still be some for a while. Check to see if you have back-to-school savings in your state.
http://taxmama.com/tax-quips/tax-holidays-coming-up/

This month’s MarketWatch column will help you determine if you owe extra taxes because of this year’s Making Work Pay Credit. Look for it next week. Or…I might just write about something new and interesting that we learn at the IRS Tax Forums – and tell you about the Making Work Pay Credit elsewhere.
http://www.marketwatch.com/Journalists/Eva_Rosenberg

Other interesting articles on MarketWatch Tax available to you include Amending Your Tax Returns to Get Refunds; Can’t Pay Your Taxes – Tips on what you can still do…and more.
http://www.marketwatch.com/taxes

EA Class News
Wow! We finished up Part 2 last night. Everyone was jubilant and ready to party. In fact, some will join me in Las Vegas next week to do just that. Lots of people have been passing Part 1. A few people have gone ahead and tackled Part 3 – and passed! Our first brave soul, Greg, took Part 2 and PASSED!

The Part 3 class will start on August 31 when we return.
www.irsexams.com

We have new FALL SPECIAL price, to give you Part 3 live and Self-Study on Parts 1 and 2
http://irsexams.com/registration/

And remember, you can get a 10% discount on the EA Class if you register for TaxMama’s Family first.
http://taxmama.com/membership/family-membership/
The discount code can be found in the Family Look-Ups resource.
http://taxmama.com/family-member-resources/
Upcoming Events

Upcoming on CPE LINK – with CPE for CPAs, EAs, and more
http://taxmama.com/earn-cpe-without-leaving-the-office/

September 1 at 12:00pm PT
Doing Tax Research Online for Free
Identify reliable sources of tax information,
how to use them and understand them.

September 15 at 10:00 PT – Roger B. Adams, EA (with minor assist from TaxMama)
Understanding Tax Treaties
Learn the fundamental principles of the purpose and application of tax treaties. Why should you care? Because there are over five million Americans living outside of the U.S., over two million of whom live in the Western hemisphere (principally in Canada and Mexico).

The IRS Practice Series
Team taught with Eva Rosenberg, EA, Tom Buck, CPA and Sonya Wilt, EA
Sep 13, 9:00am – 10 Steps to Release IRS Levies on Paychecks or Bank
Oct 8, 9:00am – 10 Steps to Resolving Collection Issues
Nov 1, 10:00am – Hands-on Collections Workshop
Dec 7, 10:00am – 6 Simple Steps to an Offer-in-Compromise (form 656)
Dec 10, 9:00am – The Un-agreed Collection Alternatives and Appeals

http://www.cpelink.com/teamtaxmama

SELF-STUDY at CPE LINK:

>Homebuyers Credits for Tax Professionals
The specific laws related to your clients. How to get it rigth the first time. What to watch out for.
And how to overcome IRS Rejections.

>IRS Practice Series: Overview of Collection Issues – Price = ZERO:
This on-demand webcast provides a broad overview of the collections process. From preparing the Power of Attorney – IRS Form 4868, to freezing the collection activity, to Offers-in-Compromise and Appeals, the course will explore the numerous collection issues a practitioner may encounter and lay the ground work for the IRS Practice Series. Topics will be covered in more detail in the dozen courses of The IRS Practice Series – leading to a Tax Mediary (CTM) Certificate upon completion of the series.
http://www.cpelink.com/teamtaxmama
Other TaxMama News:

At Equifax this week, you learn about the new Tax Increase for Wealthy Americans: Will You Pay More? Ilyce Glink tells you How to Save More Money at Home. Dan Solin gives you 10 Golden Rules All Investors Should Follow. Linda Rey tells you all about Insuring a Vacant Home. Equifax Expert Diane Moogalian gives you profound about about – Credit Report FAQs: What Do I Do When a Family Member Dies?
http://www.equifax.com/blog/tax/en_ff
This week’s AccountingWeb.com blog discusses the very unpopular new Preparer Licensing rules.
http://www.accountingweb.com/blogs/accountingweb/talk-taxmama
These rules are designed to protect taxpayers like you – so pay attention to what your preparers are saying. They are talking about it everywhere – passionately.
http://taxmama.com/forum/taxquips/new-irs-rules-for-tax-preparers/

In Money Funnies this week we give you some sarcasm about leglislative brilliance.
http://taxmama.com/category/asktaxmama/money-funnies/

In IRS News, we learn that IRS is doing away with paper payment systems as much as they can. Businesses with regular payment requirements, like payroll taxes, estimated payments, etc. will all have to go electronic next year. IRS provides explanations and alternatives. TaxMama gives you a tool to use for last-minute e-payments if you have to make a payment before your EFTPS account is set up.
http://taxmama.com/category/asktaxmama/irs-news/
In TaxQuips this week we start the week with Bill, who is really angry about the new rules for tax professionals. Look at what everyone else has to say about this – passion! Same-sex Marriage is in the news again. TaxMama explains the tax issues. Chris challenges TaxMama to provide tax-savings tips for wage-earners. I meet the challenge! We end the week with Karen whose father died. She wants to know if the settlement she’s getting is taxable.
http://taxmama.com/category/tax-quips/
Have you always wanted to understand how a Balance Sheet works? Or how to do a tax return when you work in two or more states? Bruce McFarland explains, at the TaxQueries blog!
http://blog.taxqueries.com/author/brucemcfarland/
http://blog.taxqueries.com/

As always, we love your feedback, opinions and ideas.
You are what makes all this fun – and interesting!

Please use the Comments link online.
http://taxmama.com/asktaxmama/ask-taxmama-issue-565

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Eva Rosenberg, EA

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==========================————————————————————-
TAX CALENDAR
http://taxmama.com/tax-calendar-2010/————————————————————-
08/31/2010 Time for businesses to consider setting up retirement plans
09/15/2010 Partnership Returns Due- FINAL DEADLINE
09/15/2010 Corporate Returns Due- FINAL DEADLINE
09/15/2010 S Corporate Returns Due- FINAL DEADLINE
09/15/2010 Estate & Trusts Returns – Final Deadline; Bankruptcy fillings use the same form
09/15/2010 Individuals, Farmers & Fishermen Pay 3rd Quarter Estimated Tax Payment
09/15/2010 Corporations – 3rd Quarter Estimate Tax payment Due
09/15/2010 Estates & Trusts 3rd Estimated Tax Payment
09/15/2010 Deadline for Corporations and Partnerships to fund SEP-IRAs for previous year.
09/30/2010 Last day to establish SIMPLE plans for current year
09/30/2010 Time for businesses to consider setting up retirement plans
10/15/2010 Net Operating Loss – Eligible Small Business carry back loss
10/15/2010 Personal Returns – FINAL DEADLINE————————————————————-
From TaxMama® to You!————————————————————-

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http://www.widgetbox.com/widget/taxmamas-taxquips-daily-tax-podcasts

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