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IRS and State Will Grant More Time for Paperwork, but Not for Paying Taxes Due


Q: I am deathly afraid that I won't finish my tax return by April 15. How can I get an extension form? May I also get one for my state taxes?


A: The Internal Revenue Service and state Franchise Tax Board are ready for you. But be warned:

The extension you receive is only to complete the paperwork, not to pay any taxes you owe. If you owe, you must make a reasonable estimate of the amount and pay it when you file the extension form.

Federal Form 4868 is available at all IRS branch offices and also at many U.S. post offices. You may also call the IRS' toll-free publication order line at (800) 829-3676; follow the instructions to place your order. The IRS also offers a free fax service for nearly 100 different tax forms. Call (703) 487-4160 and follow the instructions provided.

If you expect a refund from the state of California, you need not file an extension. You are automatically given until Aug. 15 to file your state return. If you owe tax, you must file the voucher form included in your state tax pamphlet along with an estimated tax payment.

Again, do not make the mistake of believing you don't have to pay your taxes by April 15. You have the extra time only to complete the paperwork. If you underestimate what you owe, you could be charged a penalty as well as interest on any outstanding balance owed.


Q: I understand that the tax basis of inherited property is its value on the date of death of the donor. What happens if the asset left by the deceased has lost value since its acquisition? Can the recipient choose between the stepped-up basis and the original basis?

Also, I know that when spouses hold their assets as community property, the surviving spouse is entitled to value his or her half of the property as of the deceased's death. But does this also include raw land?


A: Assets bequeathed at death are valued as of the donor's date of death, regardless of whether they are worth more or less than the donor paid for them. Recipients have no choice in the matter. And if you think about it, why would Uncle Sam want to give a recipient the right to claim a loss he or she never really suffered?

Consider this example: Your uncle leaves you 2,000 shares of stock at his death. He paid $12 per share for it, but it is worth just $8 per share at his death. Selling it for $8, you would realize proceeds of $16,000, tax-free. Why should Uncle Sam give you in addition an $8,000 "investment loss" for the stock's decline in value? You didn't suffer that decline. Your uncle really didn't suffer it, either, since he never sold the stock. The loss, such as it is, goes unrecognized--and is not deducted.


Q: We're confused about tax-deferred exchanges of real estate. How do these procedures work, and how much time do we have to complete one of these transactions? We have tried to read as much as we can about these exchanges, but all of this is still pretty mystifying. For example, these transactions seem to go by a lot of different names. Please clarify.


A: Tax-deferred exchanges are a complicated subject, and you will probably want to consult an expert--specifically an "accommo dator"--before proceeding.

First of all, tax-deferred exchanges, also known as Starker exchanges because of a famous legal case on the subject, are available only for similar types of property.

You may exchange a piece of investment real estate for another investment property, but you may not engage in a tax-deferred exchange of a principal residence for a piece of income property. The law outlining the requirements is contained in Section 1031 of the Internal Revenue Code, which is why these transactions are sometimes referred to as "1031 exchanges."

The law gives a seller 45 days after the close of escrow on the sale of his initial property to identify the real estate he wishes to acquire through a tax-deferred exchange. He must complete the acquisition of that property within 180 days of the escrow closing.

Pay attention: The government allows a maximum of 180 days from the close of escrow on this first property for the completion of a tax-deferred exchange. You do not have 45 days to select the property and an additional 180 days in which to complete the purchase.

When you enter escrow for the sale of your initial property, you should advise your real estate broker and your escrow officer that you intend the proceeds of the sale to go into a tax-deferred exchange. This is a very important matter, and a statement of your intentions should be included in the official escrow instructions. Equally important is the requirement that you never take possession of the proceeds from the sale of the initial property. If you do, the tax-deferred advantage of the transaction is forfeited.

Because of the strict regulations surrounding tax-deferred exchanges, you should get help from a qualified third-party accommodator before attempting one of these transactions.

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