Top 8 Questions About FIRPTA

What is FIRPTA?

 

F.I.R.P.T.A. is an acronym for Foreign Investment Real Property Tax Act. It was established in 1980 for the purpose of withholding the estimated amount of taxes which may be due on the gain of the disposition of a U.S. Real Property Interest from foreign persons. A U.S. real property interest includes sales of interests in parcels of real property as well as sales of shares in certain U.S. corporations which are considered U.S. real property holding corporations. Persons purchasing U.S. real property interests (transferee) from foreign persons are required to withhold 10 percent of the amount realized.

What is the purpose of withholding 10%?

Real estate withholding is a prepayment of anticipated tax due on the gain of the sale of a U.S. real property interest. It is not an additional tax. Any difference between the amount paid and the amount owed is refunded to the seller when a tax return is filed.

Who is responsible for finding out if the transferor is a foreign person?

It is the transferee’s/buyer’s responsibility to determine if the transferor/seller is a foreign person and subject to withholding.

Are there exceptions from FIRPTA withholding?

Yes. Exceptions are explained on the IRS website.

Who is responsible for withholding 10% of the amount realized?

Withholding is the responsibility of the transferee/buyer.

How and where is the FIRPTA withholding paid?

 

 

The IRS Form 8288 and Form 8288-A must be completed and the 10% remitted to the IRS at the address shown on Form 8288.

What is the settlement agent’s role with regards to FIRPTA?

The IRS Rule requires the transferee/buyer to determine if withholding applies and, if so to remit the withholding to the IRS. If the buyer has determined FIRPTA withholding applies, the buyer and seller may mutually instruct the settlement agent to deduct the 10%, gather the applicable forms and remit them to the IRS on their behalf.

Will a Limited Practice Officer (LPO) give legal advice with regards to FIRPTA?

 

If the LPO or settlement agent is not an attorney, they are not qualified to provide legal or tax advice relating to FIRPTA.  If you are involved in a real estate transaction with a foreign person or entity and require legal advice, you will need to seek council from a professional other than the settlement agent.  

 

A Few Items To Avoid When Purchasing Real Property With An IRA

DEFINITIONS:

What is an IRA?

An IRA is an Individual Retirement Account. It is an account that holds your investments (ie:  stocks, bonds, mutual funds, real estate, precious metals, etc.).   An owner of IRA can take advantage of various tax breaks, each having their own set of rules.

How is Real Estate Purchased Using an IRA?

The most common way to purchase real estate with an IRA is by purchasing shares in a Real Estate Investment Trust (REIT). Another method, and the subject at hand, is to purchase via a Self Directed IRA (SDIRA).  This is an IRA where the owner makes the investment decisions for the account, not a brokerage firm. 

Traditional IRA vs. Self Directed IRA: 

 

In a traditional IRA, a brokerage firm advises the IRA owner and conducts transactions.   In a Self-Directed IRA, a custodian works on the investor's behalf preparing the necessary paperwork to set up the IRA, but the investor is responsible for directing the investments.

SELF DIRECTED IRA KEY TIPS:

Keep Your SDIRA Passive:  A key component to keeping the tax advantages of the SDIRA is to keep it passive. Arms length transactions are key and it is vitally important that investors only make purchases where they plan to use the property as an investment property that will be occupied by a tenant and not the investor themselves.

Taking Cash Flow Distribution From Your Account:  The income provided from an SDIRA is the investor's money, but that does not mean he or she can bypass the IRA and take the money directly from the investment. The custodian of the IRA is responsible for all distributions and all income. Deviating from that process can wipe out the tax protections and advantages and lead to taxes and penalties. The SDIRA is for protection and tax planning and just like a traditional IRA, there are time frames for taking withdrawals and distributions.

Self-Dealing & Non-Arms Length Transactions: Often times investors are interested in the SDIRA for its tax advantages and they are interested in protecting their wealth and assets with entity protections by setting up LLC’s or other legal entities to hold title and create barriers from lawsuits. Unfortunately, these two plans do not always line up. Property can be purchased and titled in the name of an entity and funded with an SDIRA so long as the investor does not own the property before hand. In other words, an investor cannot purchase property, place it in the name of an LLC and then set up an SDIRA to purchase that property from the LLC. The transactions must be arms length in nature meaning an investor cannot buy something from himself or herself or from his or her spouse or children or parents. There are some family member exceptions but they are not pertinent to this post and the custodian would be aware of these. 

Separating Expenses From The SDIRA:  Two problems can occur when purchasing an real estate with your SDIRA. First, from the very beginning, every cost associated with the purchase must come from the SDIRA. If an investor places earnest money on a property and writes a personal check, then the transaction could be voided and considered outside of the SDIRA.  Second, if an investor purchases a property and does not leave a proper amount of reserves in the SDIRA itself, it can lead to problems. With real estate, there are always going to be scenarios where additional costs are going to be incurred. There are rules in place limiting deposits into a SDIRA just as with a traditional IRA and paying for expenses outside of the SDIRA can have major consequences. So when purchasing real estate, make sure there are additional funds in the account to cover any future expenses.

A quality custodian will always should cover these areas thoroughly on the front end and take steps to make sure mistakes are avoided. That being said, knowing the rules and properly preparing to use an IRA can lead to a great investment experience. 

Source:  realtor.com

Fiduciary Primer

DECEDENTS' ESTATES

I. Testate - Decedent had a will. The will must be probated.

A. If the will contains specific power to sell real estate (the will must specifically mention real estate), only the Executor or the Administrator With Will Annexed (W/W/A) is needed to convey the real estate and the proceeds shall be payable to the estate.

B. If the will does not give specific power to sell real estate, either:

i. A court order allowing the Executor or the Administrator W/W/A is needed. This is set out at KRS 389A; or

ii. The Executor/Administrator W/W/A can sign as well as all the heirs and their spouses with the proceeds check made payable to the estate. However, this option can only occur after the expiration of six (6) months from the appointment of the Executor/Administrator W/W/A. If the closing is to occur within the six (6) month period, the KRS 389A court order is needed.

II. Intestate - Decedent did not have a will.

A. If an estate is opened and administered:

i. The Administrator needs a KRS 389A court order allowing the estate to sell the real property, or

ii. The Administrator can sign as well as all the heirs and their spouses with the proceeds check made payable to the estate. However, this option can only occur after the expiration of six (6) months from the appointment of the Administrator. If the closing is to occur within the six (6) month period, the KRS 389A court order is needed.

B. If there is no probate:

i. Record an Affidavit of Descent, and

ii. All heirs named in Affidavit of Descent and their spouses must sign the deed conveying the property.

iii. There is a two (2) year wait period from the date of death before this can occur (See KRS 396.011).

TRUSTS

If real property is held in trust, it is imperative to determine the validity of the trust and how it pertains to the transaction at hand. A copy of the original trust agreement must be obtained and reviewed. To determine if it is a valid trust for purposes of the real estate transaction, here are some things to look for:

• Name of trust

• Named trustee

• The trust is revocable

• The borrower is both the settlor and the beneficiary of the trust

• If sale, trustee has power to sell real property and remove property from the trust

• If refinance or purchase, the real estate owned by the trust may be used as collateral for a loan

• The trustee is authorized under the trust to encumber the subject real estate

• The trust appears to be validly created and is duly existing under KY law; document is signed and notarized

POWER OF ATTORNEY

It is entirely acceptable for a purchaser or a seller to use a power of attorney at the closing on the purchase of real estate. However, most lenders and title insurance companies have certain criteria they expect to be met when it comes to the content of the power of attorney document.

Listed below are a few of these:

The power of attorney document should be specific to the transaction. The POA should mention the real estate to be purchased or sold. When mentioning the real estate, it is good form to include the legal description as well as the property address. Also, there should be a specific reference to the note and mortgage which are to be executed by the purchaser at closing. This should include the name of the lender as well as the amount financed.

While it is acceptable for the POA to grant the power to execute certain general closing documents, it is a good idea that the POA specifically grant the power to execute the note, mortgage and deed as well as any documents which the lender feels need specific mention.

The POA should also be a durable one. This means it needs specific language that it will remain in effect despite the subsequent disability of the principal, the person granting the powers.

　

Remember, these are guidelines and there may be exceptions. If you need further information we are always available

Listing Real Estate Agent's Duty to the Buyer

     Interesting case from the Kentucky courts:  Waldridge v. Homeservices of Kentucky, 2011 Ky. App. LEXIS 81 (Ky. App. April 29, 2011)

     The court held that a sellers' real estate agent owes a duty to a buyer to not commit fraud by either misrepresenting a material fact or failing to disclose a material fact of which he or she has actual knowledge and of which the buyer is unaware. 

     The Waldridges contacted an agent to assist with their search for a new home.  They ultimately purchased a new home which was listed for sale by the same company.  Prior to the purchase of the home, the sellers had noted on the disclosure statement that prior water damage had occurred due to a sump-pump failure.  In fact, the home had been owned by four previous owners, who experienced water damage and flooding, all since the home was built in 1988, and the damage and risk of flooding was much worse than what was noted on the disclosure.  The listing company had been involved with the property for all of its previous sales.

     The court considered whether the listing company or its agent could be liable for fraudulent conduct despite having no contractual relationship with the buyer.  The court found that, even in the absence of a fiduciary duty, a real estate agent  hired by the seller is expected to be honest and owes a duty to third parties involved in real estate transactions.  The court ultimately remanded the case for further fact-finding but suggested that both the listing company and its agent could potentially be liable under these facts.  The court found that it was plausible that the listing company had actual knowledge of the extent of the flooding due to its previous involvement with the sales of the home.  The court further held that a fact question remained as to whether the listing company or its agent knew that the disclosure was false because it was clear that the sellers knew the damage was worse than they reflected on their disclosure statement. 


    

GOOD FUNDS VS. COLLECTED FUNDS

The following information comes courtesy of Stewart Title.  There is sometimes confusion at a real estate closing about whether there are funds to close.  Unfortunately, unless you are a banker, it can get quite confusing as different terms are bandied back and forth.  The following provides good insight into the information the title agent must take into account relating to the receipt and the disbursement of funds at closing.

Good Funds"Good funds" laws provide a statutory definition of acceptable escrow deposit instruments. These laws generally regulate the types of funds that a title company or escrow agent can accept and/or the minimum length of time that such funds must remain on deposit in a bank before they can be disbursed. For example, "good funds" laws may require wired funds, cashier's check, certified check or teller's check to be deposited, and/or may limit the amount of personal checks that are permitted. "Good funds" requirements are the minimum state-imposed standards relating to escrow practices. They are not a safe harbor. They do not override banking procedures and collection practices. For example, certain types of checks may be deemed "good funds" under your laws, but such checks nevertheless may be subject to stop payment orders and be uncollectable or unavailable for withdrawal from the bank of deposit under certain circumstances.

Issuing offices sometimes assume that they can disburse funds immediately after they have received checks satisfying the "good funds" criteria in their jurisdiction, without regard to whether or not the funds are actually available for withdrawal and/or have been actually collected and finally settled into their escrow account. However, that assumption is incorrect. Compliance with "good funds" requirements may not protect you from loss in the event a check is dishonored and returned to you unpaid.

"Good funds" is primarily a title and escrow term. "Good funds" should be distinguished from "available funds" and "collected funds", which are banking terms.

Available Funds / Available Balance
 "Available funds" (sometimes referred to as "funds available for withdrawal") refers to funds that a depositary bank (your bank) makes available to a depositor (you) when a deposit is made, based upon a schedule. However, the term "available" is potentially misleading.

Issuing offices sometimes assume that they can disburse funds immediately after such funds appear as "available" on their statement or online. However, that assumption is incorrect. The deposit of a check into your account at your bank does not mean that funds have actually been transferred to your bank or to your account. Deposited funds can be considered "available for withdrawal" from your bank well before a check has been presented for payment or paid by the paying bank (also known as the "drawee bank" - the bank upon which a check is drawn). Deposited funds are made conditionally available (e.g., for withdrawal) by your bank to you as a provisional credit to your account, based upon the likelihood that the funds will eventually be collected. If the paying bank ultimately declines to pay a check (for example, if the paying bank determines that a check is counterfeit or if there are insufficient funds in the drawer's account), your bank will eventually reverse the provisional credit, and the "available funds" will be debited - deducted - from your account. It may take several days, perhaps weeks, for this reversal to occur. Checks drawn on foreign banks can take even longer.

The term "available balance" refers to the total amount that your bank will make available to you. However, the "available balance" is not the amount of funds that have actually been collected.

Collected Funds / Collected Balance "Collected funds"(sometimes referred to as "actually and finally collected funds") refers to funds that result from the process of "collection". "Collection" is the presentation of a check to a paying bank and the actual payment of the funds by the paying bank. Final collection from the paying bank and final settlement of the funds into your escrow account can take several days, or potentially weeks, to be completed. If a check is counterfeit, it may be quite some time before you become aware that the deposit cannot be "collected," and that the provisional credit to your account will be reversed.

The term "collected balance" refers to the depositor's (your) balance minus deposited checks in the process of collection (i. e., minus checks that have not been actually paid by the paying bank). "Collected funds" are actual funds, not provisionally "available" funds.

Concerns Relating to Counterfeit Bank Checks and Certified ChecksCheck fraud schemes often involve counterfeit bank checks (e.g., cashier's checks or teller's checks) and/or certified checks. A cashier's check is a check drawn by a bank on its own funds and signed by a bank officer. A teller's check is a check drawn by a bank either on another bank or payable through or at another bank. A certified check is a check drawn by a depositor on his checking account carrying the signature of a drawee bank officer certifying the check to be genuine and guaranteeing its payment. Both bank checks and certified checks are generally considered "good funds" and are often readily accepted. A cashier's check is the industry preference over either a teller's check or certified check, because a cashier's check is generally easier to verify and more difficult to place a stop payment on.

Funds from bank checks or certified checks can be made "available" by your bank for provisional credit to your account on an expedited basis. However, such checks can be counterfeit, and it can be quite some time before they are discovered to be fake. Subtle alterations in the coding of the checks can slow the processing and discovery of the counterfeit. Perpetrators rely upon this gap to execute their schemes.

The following fact pattern is not uncommon: A perpetrator delivers a counterfeit bank check to a victim (e.g., an escrow office). The escrow office deposits the fake bank check into their account. The amount of the deposit is made "available" by the victim's bank shortly thereafter. While the counterfeit check is being processed by the banking system, and before the depositor/victim becomes aware of the fraud, the perpetrator requests the return of the funds by wire transfer or electronic funds transfer . There is frequently a feigned urgent need, and the perpetrator pressures the depositor/victim to wire the funds immediately, to the perpetrator or to an accomplice. Since the funds from the counterfeit check have been made provisionally "available" by their bank, the depositor/victim mistakenly assumes that they are collected funds, and sends the wire. At some point, the counterfeit check is presented for payment to the paying bank, and the paying bank declines to pay it. A notice of nonpayment returns through the banking system, and ultimately the depositor/victim learns that the check was fake. The depositor's bank reverses the provisional credit and deducts the amount of the deposit from the victim's account.

The only way to assure that funds are immediately collected and irrevocable is to require deposits to be made to your account by federal wire.

Electronic Funds Transfers
An electronic funds transfer ("EFT") through the Automated Clearing House ("ACH") poses special concerns. Funds deposited through ACH are subject to an extended time for settlement: 3 - 60 days, depending upon the nature of the credit. During that time, the ACH credit is subject to reversal by the originator. An "ACH debit block" will not protect against such reversal. Therefore, you should not accept deposits to escrow by ACH unless you implement special procedures, as described below.

Summary of Kentucky Foreclosure Laws

The laws that govern Kentucky foreclosures are found in different sections of the Kentucky Revised Statutes, Chapter 426.

Kentucky is a lien theory state. This means the property acts as security for the underlying loan. The mortgage is the document that places the lien on the property. It is filed to evidence the underlying loan and the specific terms of repayment which are set forth in the promissory note. There is no power of sale mortgage provision recognized in the KRS. In order to foreclose on a mortgage, the lender must go to court in what is known as a judicial foreclosure proceeding.  A lis pendens is recorded in the deed records at the time the foreclosure complaint is filed.  It provides public notice that the property is being foreclosed upon.  During the foreclosure proceeding, the court will issue a final judgment of foreclosure. The property will then be sold as part of a publicly noticed sale.

Before the property is sold at foreclosure sale, the sale is usually advertised for sale for at least three weeks prior.  

Kentucky does have a limited statutory right of redemption, which allows a party whose property has been foreclosed to reclaim that property by making payment in full of the sum of the unpaid loan plus costs and ten percent interest. There is a one year time limit to exercise this right and the right is only available if the foreclosure sales price is less than two-thirds of the appraised value.  Also, the right of redemption can be sold or assigned to a third party. 

A deficiency judgment may be obtained when a foreclosed property is sold at a public sale for less than the loan amount that the mortgage secures. In this case, the borrower still owes the lender for the difference between what the property sold for at the foreclosure sale and the amount of the original loan.  Deficiency judgments are only available in the event that the borrower was personally served with the foreclosure complaint and/or was served, but did not file an answer. 

Summary of Indiana Foreclosure Laws

The laws that govern Indiana foreclosures are found in Article 29, Chapter 7 of the Indiana Code

Indiana is a lien theory state.  This means the property acts as security for the underlying loan.  The mortgage is the document that places the lien on the property.  It is filed to evidence the underlying loan and the specific terms of repayment which are set forth in the promissory note.  There is no power of sale mortgage provision recognized in the Indiana Code.  In order to foreclose on a mortgage, the lender must go to court in what is known as a judicial foreclosure proceeding.  During this proceeding, the court will issue a final judgment of foreclosure.  The property would then be sold as part of a publicly noticed sale.

Before the property is sold at foreclosure sale, the sheriff must advertise the sale by publication once per week for three (3) consecutive weeks in a newspaper of general circulation.  The initial publication must be made thirty (30) days before the date of sale.  The borrower/homeowner must be served notice in accordance with the Indiana Rules of Trial Procedure governing personal service. 

Indiana doesn't have a post sale statutory right of redemption, which allows a party whose property has been foreclosed to reclaim that property by making payment in full of the sum of the unpaid loan plus costs. However, there is a pre-sale right to redemption after the issuance of the judgment.

A deficiency judgment can be obtained when a foreclosed property is sold at a public sale for less than the loan amount that the underlying mortgage secures. In this case, the borrower still owes the lender for the difference between what the property sold for at the foreclosure sale and the amount of the original loan.

FTC Will Not Enforce Provisions of MARS Rule Against Real Estate Professionals Helping Consumers Obtain Short Sales

 

The Federal Trade Commission will forbear from enforcing most provisions of its Mortgage Assistance Relief Services (MARS) Rule against real estate brokers and their agents who assist financially distressed consumers in obtaining short sales from their lenders or servicers.

As a result of the stay on enforcement, real estate professionals will not have to make several disclosures required by the Rule that, in the context of assisting with short sales, could be misleading or confuse consumers. As more and more American homeowners seek short sales, it is especially important that the Rule not inadvertently discourage real estate professionals from helping consumers with these types of transactions.

The MARS Rule was issued pursuant to authority granted by Congress in 2009. The issuance of the Rule followed numerous FTC and state enforcement actions against companies that claimed to be able to obtain from consumers’ mortgage lenders or servicers a loan modification or other relief to avoid foreclosure. The Rule covers companies or individuals, among others, who assist consumers in obtaining approval of a short sale from their lender or servicer.

A short sale occurs when a home is sold for an amount less than the balance owed on the mortgage loan, and the lender or servicer agrees to accept the proceeds of the sale instead of pursuing foreclosure. Short sales can benefit consumers by allowing them to escape from a mortgage that they cannot afford, while avoiding foreclosure. Many real estate professionals assist distressed homeowners by providing both traditional services associated with selling their homes (e.g., listing the property) and working to seek lender or servicer approval of a short sale.

The MARS Rule requires companies offering mortgage assistance relief services to disclose certain information to consumers about the services they provide, bans collection of advance fees, and prohibits false or misleading claims. After the Rule went into effect, a number of real estate professionals who help consumers with short sales raised concerns about complying with the Rule. These professionals pointed out that some of the required disclosures could confuse consumers or could be inaccurate in this context.

At this time, the Commission has announced that it will not enforce most of the provisions of the MARS Rule against real estate professionals who are engaged in obtaining short sales for consumers. The stay applies only to real estate professionals who: 1) are licensed and in good standing under state licensing requirements; 2) comply with state laws governing the practices of real estate professionals; and 3) assist or attempt to assist consumers in obtaining short sales in the course of securing the sales of their homes. The stay exempts real estate professionals who meet these requirements from the obligation to make disclosures and from the ban on collecting advance fees. These professionals, however, remain subject to the Rule’s ban on misrepresentations.

The Commission stated that the stay does not apply to real estate professionals who provide other types of mortgage assistance relief, such as loan modifications. In addition, the FTC will continue to enforce the Rule and Section 5 of the FTC Act, which prohibits unfair and deceptive practices, against all other providers of mortgage assistance relief services.

FTC

Changes in HAMP - Home Affordable Modification Program

Recently, new changes have been enacted regarding the HAMP program.  HAMP was originally designed to help borrowers with a higher debt load by offering incentives to banks to reduce the principal on mortgage loans.  HAMP was supposed to help 4 million mortgage borrowers when it was introduced in February of 2009, but it has helped fewer than 1 million homeowners.

Here are a few of the changes:

1.  HAMP was extended until December of 2013 - it was originally set to expire at the end of this year.

2.  Eligibility has been expanded - originally, there was a floor for the borrower's debt ratios set at 31% of the borrower's income.  This is no longer the case.  The new guidelines allow for a more flexible approach without the hard floor.

3.  Eligibility has been extended to owner's of rental property - HAMP originally applied solely to owner occupied property; this is no longer the case.

4.  The balance reductions incentives to lenders have been tripled - New HAMP guidelines will pay lenders between 18 and 63 cents for every dollar of reduction of the mortgage principal balance, up from 6 and 21 cents.

5.  Fannie Mae and Freddie Mac loans are now included - Fannie and Freddie loans had not been included in the principal reduction plans, previously. 

The changes in HAMP do not take effect until April.

CNN-Money

The Home Affordable Refinance Program (HARP)

In 2009, the Home Affordable Refinance Program was established for Fannie Mae and Freddie Mac loans. It allows home owners to refinance their homes, even if the value of the home has decreased.  Homeowners with a loan owned by Freddie Mac or Fannie Mae have the opportunity to refinance with any participating lender.  The Home Affordable Refinance Program (HARP) has been extended until December 31, 2013.

The following criteria must be met to qualify for the Home Affordable Refinance Program:

1.  HARP refinances apply only to Fannie Mae or Freddie Mac mortgages.

2.  The homeowner must be able to afford the new lower payment. 

3.  The current mortgage must be current with no late payments in the past twelve (12) months.

4.  Payments on the new loan must be more stable than on the existing loan.

5.  The maximum loan to value (LTV) cap has been removed on home owners looking to refinance in to a fixed rate mortgage.  It was originally set at 125%.

6.  Homeowners can refinance with an adjustable rate mortgage (ARM), so long as the maximum LTV does not exceed 105%.

A participating HARP lender can determine if a loan is owned by Fannie Mae or Freddie Mac and can further evaluate eligibility.