Bronitsky Law

In an ordinary business dispute when the parties are unable to agree, one files a civil action and the court or jury ultimately decides who is right and who is wrong.  When the parties are also landlord and tenant the landlord’s right to evict and the tenant’s right to seek relief from lease forfeiture add additional tactical considerations.

In the recent case of Gill Petrolium, Inc. v Hayer (2006) 137 Cal.App.4th 826, the parties were in a dispute about who was responsible to pay the state the fees for the underground storage tanks on the leased premises which included a gas station.  Ultimately the landlord paid the fees, added them as rent under the lease and filed an unlawful detainer (eviction action) against the tenant.  The trial court entered judgment for the landlord, awarded money damages and a termination of the lease.  Thus, the tenant initially not only lost on the point of who was to pay the fees, but also lost its favorable lease on the property.  What this demonstrates is that the possibility of terminating the lease and regaining possession of the property gives the landlord an additional sword with which to attack a tenant when a dispute arises.

The tenant, however, under California Code of Civil Procedure Section 1179, successfully sought relief from the forfeiture of the lease and thus ended up only losing on the business issues and kept the favorable lease.  However, tenants must realize that under §1179, tenants who lose an unlawful detainer case must show “hardship” in order to avoid forfeiture.  While much is left to the discretion of the trial court in this area, hardship must be something more that just the loss of the lease itself and the trial court must make a full examination of all of the equities involved.

Thus, tenants need to be cautious when disputing business issues with their landlord.  The safest course of conduct would be for the tenant to pay the disputed amount and then sue the landlord rather than risk losing the lease as well as the dispute.  As always, consult your attorney before taking any course of action as the law is in flux and your particular situation may present facts that would help make a better decision.

We provide this material for information only. We are not providing legal advice of any kind to anyone, nor are we creating an attorney client relationship with anyone using this information and therefore you may not rely on this information in taking any action or failing to take action. If you want advice specific to your situation, you can contact us through our contact page here at the blog to discuss your matter and determine if we can provide you with representation. DO NOT take any action without consulting an attorney regarding your particular situation as the action you take may not comply with the law.

In the recent case of Johnson v City & County of San Francisco (2006) 137 Cal.App.4th 7 the California Court of Appeal held that the San Francisco Rent Control Ordinance which required a landlord to tell a tenant the amount the landlord believed the tenant was entitled to under the Ellis Act was invalid.

Johnson owned an interest in a multi-unit residential building in San Francisco and had an exclusive right to occupy a unit in that building, from which he sought to evict the tenants. The San Francisco Ordinance required landlords who sought to evict under the Ellis Act (Govt C §§7060-7060.7)—which allows landlords to evict tenants in order to go out of business and to pay their tenants’ relocation costs (people with disabilities or older than 62 received additional benefits) to notify their tenants about their right to receive payment and “the amount of payment which the landlord believes to be due.” Johnson challenged this requirement in the Superior Court which ruled against Johnson.

The California Court of Appeal reversed the trial court, holding that while the Ellis Act does not prohibit local governments from providing procedural protections designed to prevent abuse of the right to evict tenants, it completely occupies the field of substantive eviction controls and therefore preempts the belief requirement because the belief requirement creates an substantive defense not permitted under the Ellis Act.

The Court of Appeal held that Government Code §7060.4 provides detailed guidance regarding the types of local ordinance provisions that may be enacted to require property owners to give notice of their intent to leave the rental market. By carefully spelling out only specific types of notice that may be require, the Ellis Act clearly sets forth the understanding that only those types of notice are authorized and other, additional notice requirements are therefore not allowed.

We provide this material for information only. We are not providing legal advice of any kind to anyone, nor are we creating an attorney client relationship with anyone using this information and therefore you may not rely on this information in taking any action or failing to take action. If you want advice specific to your situation, you can contact us through our contact page here on the blog to discuss your matter and determine if we can provide you with representation. DO NOT take any action without consulting an attorney regarding your particular situation as the action you take may not comply with the law and therefore you could subject yourself to significant risks

California Probate Code section 4701 allows individuals to make major health care decisions by preparing an Advanced Health Care Directive. You can learn more about Advanced Health Care Directives at the California Attorney General’s website by clicking here. There are also some sample forms there to review.

Recently, the California Secretary of State adopted some regulations which allows for the registration of Advanced Health Care Directives. This program provides that the California Secretary of State can now receive and release a person’s advanced health care directive, transmit the directive to a registry in another jurisdiction if requested, and respond to an emergency department of an acute care facility to get your wishes known to them when you are unable.

There is a form for recording of the Advanced Health Care Directive which you can find by clicking here. and the current fee is $10.

If you are interested in learning more about the benefits of estate related planning, including advanced health care directives, please contact us through our contact page here at the blog.

Revenue Procedure 2005-14 now allows taxpayers to combine the benefits of IRC section 121 ($250,000 per person exclusion for sale of residence under certain conditions) with IRC Section 1031 (tax deferred, like kind exchange) to save or defer taxes on the sale of a residence that was converted to investment property (or vice versa) or on property that was used for both residential and business purposes.

IRC Section 121 allows a taxpayer to exclude $250,000 of gain on the sale of a personal residence ($500,000 per married couple) when that person has resided at the property for two of the five years prior to the sale or exchange.

IRC Section 1031 allows the deferral of capital gain realized by exchanging property held for productive use in a trade or business or for investment for like-kind property to be held for productive use in a trade or business or for investment. (To the extent that the taxpayer also receives cash or other non like-kind property (boot), gain must be recognized).

Because these Section 121 deals with the taxpayer’s residence and Section 1031 deals with the taxpayer’s investment property, many treated the two as mutually exclusive. However, Revenue Procedure 2005-14 now allows a taxpayer, in certain circumstances, to take advantage of both sections in the same transaction.

Below we have reprinted the examples exactly as set forth in Revenue Procedure 2005-14 showing various ways in which a taxpayer can take advantage of these two sections together. We did not author these examples, rather they are quotes from the Procedure itself.

We provide this material for information only. We are not providing legal advice of any kind to anyone, nor are we creating an attorney client relationship with anyone using this information and therefore you may not rely on this information in taking any action or failing to take action. If you want advice specific to your situation, you can contact us through our contact page here at the blog to discuss your matter and determine if we can provide you with representation. DO NOT take any action without consulting an attorney regarding your particular situation as the action you take may not comply with the law and therefore you could subject youself to tax, interest, and penalty, which in the case of some tax related offenses can be jail time! The full text of Revenue Procedure can be found at http://www.irs.gov/irb/2005-07_IRB/ar10.html.

In each example below, the taxpayer is an unmarried individual and the property or a portion of the property has been used in the taxpayer’s trade or business or held for investment within the meaning of § 1031(a) as well as used as a principal residence as required under § 121.

Example 1. (i) Taxpayer A buys a house for $210,000 that A uses as A’s principal residence from 2000 to 2004. From 2004 until 2006, A rents the house to tenants and claims depreciation deductions of $20,000. In 2006, A exchanges the house for $10,000 of cash and a townhouse with a fair market value of $460,000 that A intends to rent to tenants. A realizes gain of $280,000 on the exchange.

(ii) A’s exchange of a principal residence that A rents for less than 3 years for a townhouse intended for rental and cash satisfies the requirements of both §§ 121 and 1031. Section 121 does not require the property to be the taxpayer’s principal residence on the sale or exchange date. Because A owns and uses the house as A’s principal residence for at least 2 years during the 5-year period prior to the exchange, A may exclude gain under § 121. Because the house is investment property at the time of the exchange, A may defer gain under § 1031.

(iii) Under section 4.02(1) of this revenue procedure, A applies § 121 to exclude $250,000 of the $280,000 gain before applying the nonrecognition rules of § 1031. A may defer the remaining gain of $30,000, including the $20,000 gain attributable to depreciation, under § 1031. See section 4.02(2) of this revenue procedure. Although A receives $10,000 of cash (boot) in the exchange, A is not required to recognize gain because the boot is taken into account for purposes of § 1031(b) only to the extent the boot exceeds the amount of excluded gain. See section 4.02(3) of this revenue procedure.

These results are illustrated as follows.

(iv) A’s basis in the replacement property is $430,000, which is equal to the basis of the relinquished property at the time of the exchange ($190,000) increased by the gain excluded under § 121 ($250,000), and reduced by the cash A receives ($10,000)). See section 4.03 of this revenue procedure.

Example 2. (i) Taxpayer B buys a property for $210,000. The property consists of two separate dwelling units (within the meaning of § 1.121-1(e)(2)), a house and a guesthouse. From 2001 until 2006, B uses the house as B’s principal residence and uses the guesthouse as an office in B’s trade or business. Based on the square footage of the respective parts of the property, B allocates 2/3 of the basis of the property to the house and 1/3 to the guesthouse. In 2006, B exchanges the entire property for a residence and a separate property that B intends to use as an office. The total fair market value of B’s replacement properties is $360,000. The fair market value of the replacement residence is $240,000 and the fair market value of the replacement business property is $120,000, which is equal to the fair market value of the relinquished business property. From 2001 to 2006, B claims depreciation deductions of $30,000 for the business use. B realizes gain of $180,000 on the exchange.

(ii) Under § 121, B may exclude gain of $100,000 allocable to the residential portion of the house (2/3 of $360,000 amount realized, or $240,000, minus 2/3 of $210,000 basis, or $140,000) because B meets the ownership and use requirements for that portion of the property. Because the guesthouse is business property separate from the dwelling unit and B has not met the use requirements for the guesthouse, B may not exclude the gain allocable to the guesthouse under § 1.121-1(e). However, because the fair market value of the replacement business property is equal to the fair market value of the relinquished business property and B receives no boot, B may defer the remaining gain of $80,000 (1/3 of $360,000 amount realized, or $120,000, minus $40,000 adjusted basis, which is 1/3 of $210,000 basis, or $70,000, adjusted by $30,000 depreciation) under § 1031.

These results are illustrated as follows:

(iii) Because no portion of the gain attributable to the relinquished business property is excluded under § 121 and B receives no boot and recognizes no gain or loss in the exchange, B’s basis in the replacement business property is equal to B’s basis in the relinquished business property at the time of the exchange ($40,000). B’s basis in the replacement residential property is the fair market value of the replacement residential property at the time of the exchange ($240,000).

Example 3. (i) Taxpayer C buys a property for $210,000. The property consists of a house that constitutes a single dwelling unit under § 1.121-1(e)(2). From 2001 until 2006, C uses 2/3 of the house (by square footage) as C’s principal residence and uses 1/3 of the house as an office in C’s trade or business. In 2006, C exchanges the entire property for a residence and a separate property that C intends to use as an office in C’s trade or business. The total fair market value of C’s replacement properties is $360,000. The fair market value of the replacement residence is $240,000 and the fair market value of the replacement business property is $120,000, which is equal to the fair market value of the business portion of the relinquished property. From 2001 to 2006, C claims depreciation deductions of $30,000 for the business use. C realizes gain of $180,000 on the exchange.

(ii) Under § 121, C may exclude the gain of $100,000 allocable to the residential portion of the house (2/3 of $360,000 amount realized, or $240,000, minus 2/3 of $210,000 basis, or $140,000) because C meets the ownership and use requirements for that portion of the property.

(iii) The remaining gain of $80,000 (1/3 of $360,000 amount realized, or $120,000, minus $40,000 adjusted basis, which is 1/3 of $210,000 basis, or $70,000, adjusted by $30,000 depreciation) is allocable to the business portion of the house (the office). Under section 4.02(1) of this revenue procedure, C applies § 121 before applying the nonrecognition rules of § 1031. Under § 1.121-1(e), C may exclude $50,000 of the gain allocable to the office because the office and residence are part of a single dwelling unit. C may not exclude that portion of the gain ($30,000) attributable to depreciation deductions, but may defer the remaining gain of $30,000 under § 1031.

These results are illustrated as follows:

(iv) C’s basis in the replacement residential property is the fair market value of the replacement residential property at the time of the exchange ($240,000). C’s basis in the replacement business property is $90,000, which is equal to C’s basis in the relinquished business property at the time of the exchange ($40,000), increased by the gain excluded under § 121 attributable to the relinquished business property ($50,000). See section 4.03 of this revenue procedure.

Example 4. (i) The facts are the same as in Example 3 except that C also receives $10,000 of cash in the exchange and the fair market value of the replacement business property is $110,000, which is $10,000 less than the fair market value of the business portion of the relinquished property ($120,000).

(ii) Under § 121, C may exclude the gain of $100,000 allocable to the residential portion of the house (2/3 of $360,000 amount realized, or $240,000, minus 2/3 of $210,000 basis, or $140,000).

(iii) The remaining gain of $80,000 (1/3 of $360,000 amount realized, or $120,000, minus $40,000 adjusted basis) is allocable to the business portion of the house. Under section 4.02(1) of this revenue procedure, C applies § 121 to exclude gain before applying the nonrecognition rules of § 1031. Under § 1.121-1(e), C may exclude $50,000 of the gain allocable to the business portion of the house but may not exclude the $30,000 of gain attributable to depreciation deductions. Under section 4.02(2) of this revenue procedure, C may defer the $30,000 of gain under § 1031. Although C receives $10,000 of cash (boot) in the exchange, C is not required to recognize gain because the boot is taken into account for purposes of § 1031(b) only to the extent the boot exceeds the amount of excluded gain attributable to the relinquished business property. See 4.02(3) of this revenue procedure.

These results are illustrated as follows:

(iv) C’s basis in the replacement residential property is the fair market value of the replacement residential property at the time of the exchange ($240,000). C’s basis in the replacement business property is $80,000, which is equal to C’s basis in the relinquished business property ($40,000), increased by the gain excluded under § 121 ($50,000), and reduced by the cash ($10,000) received. See section 4.03 of this revenue procedure.

Example 5. (i) The facts are the same as in Example 3 except that the total fair market value of the replacement properties is $540,000. The fair market value of the replacement residence is $360,000, the fair market value of the replacement business property is $180,000, and C realizes gain of $360,000 on the exchange.

(ii) Under § 121, C may exclude the gain of $220,000 allocable to the residential portion of the house (2/3 of $540,000 amount realized, or $360,000, minus 2/3 of $210,000 basis, or $140,000).

(iii) The remaining gain of $140,000 (1/3 of $540,000 amount realized, or $180,000, minus $40,000 adjusted basis) is allocable to the business portion of the house. Under section 4.02(1) of this revenue procedure, C excludes the gain before applying the nonrecognition rules of § 1031. Under § 1.121-1(e), C may exclude $30,000 of the gain allocable to the business portion, at which point C will have excluded the maximum limitation amount of $250,000. C may defer the remaining gain of $110,000 ($140,000 realized gain minus the $30,000 gain excluded under § 121), including the $30,000 gain attributable to depreciation, under § 1031.

These results are illustrated as follows:

(iv) C’s basis in the replacement residential property is the fair market value of the replacement residential property at the time of the exchange ($360,000). C’s basis in the replacement business property is $70,000, which is equal to C’s basis in the relinquished business property ($40,000), increased by the amount of the gain excluded under § 121 ($30,000). See section 4.03 of this revenue procedure.

Example 6. (i) The facts are the same as in Example 3 except that the total fair market value of the replacement properties is $750,000. The fair market value of the replacement residence is $500,000, the fair market value of the replacement business property is $250,000, and C realizes gain of $570,000 on the exchange.

(ii) The gain allocable to the residential portion is $360,000 (2/3 of $750,000 amount realized, or $500,000, minus 2/3 of $210,000 basis, or $140,000). C may exclude gain of $250,000 from gross income under § 121. C must include in income the gain of $110,000 allocable to the residential portion that exceeds the § 121(b) exclusion limitation amount.

(iii) The remaining gain of $210,000 (1/3 of $750,000 amount realized, or $250,000, minus $40,000 adjusted basis) is allocable to the business portion of the house. C may defer the $210,000 of gain, including the $30,000 gain attributable to depreciation, under § 1031.

These results are illustrated as follows:

(iv) C’s basis in the replacement residential property is the fair market value of the replacement residential property at the time of the exchange ($500,000). C’s basis in the replacement business property is $40,000, which is equal to C’s basis in the relinquished business property at the time of the exchange.