Stay Savvy…Stay Safe…

The FBI recently released its 2019 Internet Crimes Report. The top category, Business Email Compromise (BEC), and Email Account Compromise (EAC) once again topped the list, dwarfing all other categories and, despite continued warnings, continues to grow year after year.

These BEC scams often lead to wire transfer fraud. According to the FBI, there were 11,677 victims in 2019 with $221 million in losses due to wire transfer fraud. This compares to 11,300 reported victims and $150 million in losses in 2018.

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FIRPTA Rules

FIRPTA, the Foreign Investment in Real Property Transfer Act, is part of the U.S. tax code. It requires buyers of real estate to withhold up to 15% of the sale price when a seller is a foreign person. If the buyer does not withhold the required funds, and if the IRS cannot collect from the seller the tax owed on the transaction, then the buyer will be liable for the payment of the tax, plus interest. As such, whether buying commercial or residential real estate, it’s important to understand the requirements of FIRPTA.

FIRPTA Diagram

Download pdf version of FIRPTA Flyer

 

FIRPTA: Frequently Asked Questions

Q: Who is responsible for FIRPTA withholding?

A: The IRS rules place the responsibility for withholding potential income tax due in the amount of 10% of the purchase price on the buyer of the real property from a foreign entity. The real property becomes the security for the IRS to ensure that they receive taxes that are due to them. If the payment is not made by the buyer, the IRS can seize the real property (or other assets of the buyer).

Q: Can’t the buyer assign the responsibility for withholding to the settlement or escrow agent?

A: There are no provisions in the IRS rules for the buyer to assign their responsibility to anyone else, including the escrow or real estate agents. The escrow agent cannot provide legal or tax advice.

Q: The seller is foreign, but has a social security number. We’re okay, right?

A: If the seller is foreign, it is likely they do not have a social security number. Foreign citizens doing business and earning income in the United States are required to have taxpayer identification numbers (TINS). These look similar to social security numbers. The test of whether FIRPTA withholding is required or not, is a statement made by the seller under penalty of perjury that they are not a non-resident alien for purposes of U.S. income taxation.

Q: I don’t understand what that means, “not a non-resident alien”. What does that mean?

A: Another way to explain that (although it may not cover all situations) is that the seller must either be a U.S. citizen or resident alien with a green card.

Q: The seller is taking a loss on their home. They don’t need to pay FIRPTA withholding, right?

A: Under FIRPTA there is no automatic exemption from withholding if the seller is taking a loss or no gain. If a foreign seller feels they are exempt from FIRPTA withholding because there is no gain on the sale, they need to consult with a tax expert and may find they need to apply for a withholding certificate from the IRS that will grant them the exemption on the transaction using IRS form 8288-B. If this is the case, this should occur early on in the transaction.

Q: A foreign seller doesn’t have a TIN and is willing to pay the IRS. Can the money just be sent to the IRS without a TIN?

A: No, the IRS requires that sellers of real property have TINs.

Q: A foreign seller only owns a portion of the property. How much money does the foreign seller owe?

A: The foreign seller will owe withholding on their percentage of ownership of the property.

Q: The property is under $300,000 and the buyer is going to live in it. Doesn’t that automatically exempt it from withholding?

A: The buyer must agree to sign an affidavit stating that the purchase price is under $300,000 and the buyer intends to occupy. The buyer may choose not to sign the form, in which case withholding must be done.

Q: Isn’t a transaction from a foreign seller to a foreign buyer exempt from withholding?

A: No. The same rules apply, and both parties are required to have TINs.

Q: The FIRPTA withholding was paid at close of escrow, but not that much money was due to the IRS. How does the seller get their money back?

A: The seller can either in advance of closing file an 8288-B Application for Withholding Certificate to request a reduced amount or no withholding. The seller can also file a tax return the following year to obtain any refund due.  A CPA or other tax expert should be consulted for guidance.

Q: The sellers and buyer don’t want to pay a CPA to answer their questions. Can’t the real estate person or escrow person help with FIRPTA questions?

A: Escrow personnel and real estate agents may have experience with FIRPTA, but are not qualified to provide advice on individual taxpayer’s situations.

Q: The seller lives in another country, but says they are a U.S. citizen. Isn’t withholding required?

A: U.S. citizens may be living in other countries. Current residency is not a good indication of FIRPTA status.

 

Who Pays What at Closing in California

We’re all familiar with the customary practices for closing costs in LA County. But if your client is dealing with a property outside of LA County you need to forearm them with local knowledge of customary practices and fees in that city or county.

The following table details customary local practices as to who pays for:

  • Escrow Charges
  • Title Fees
  • Transfer taxes

Also, since many cities and counties have their own transfer taxes, we also provide calculations for those entities.

Download a pdf version of this flyer:  Who Pays What pdf

Who Pays What in CA 1

Who Pays What in CA 2

Download a pdf version of this flyer:  Who Pays What pdf

Why it’s a Bad Idea to Use Credit Cards for Closing Funds

Some title companies (such as those specializing in timeshare closings) accept credit card payments. Their closings are performed remotely, meaning the principals do not appear at the title company in person and the amount due at closing does not exceed most credit card limits. Then why do title companies not regularly accept credit cards as a form of payment at closing? Credit cards are not accepted in a real estate transaction for many reasons.

Here are just a few:

  • Lenders typically do not allow borrowers to extend their debt ratio during the home loan process since extending debt lowers the borrower’s credit score. The home loan approval process requires the borrower to have the down payment and closing costs in hand. Lenders do not want the borrower to have to also borrow the funds needed to close. If the borrowers are not using their own out-of-pocket funds as down payment, they are more likely to default on the loan.
  • Cardholders retain the right to claw back their payment for 90 days. Credit card companies are consumer friendly and allow the cardholder to dispute payments for up to 90 days. This presents a problem because title companies would have to open an account with the credit card company- the credit card company can withdraw any payments transmitted to the title company that their cardholder disputes. That means the title company has to hire and train staff to reconcile the separate account and respond to any disputed payments quickly in order to retain payments.
  • Costly secure software is required to process a credit card payment. In order to process a credit card, the title company would need to subscribe to credit card processing software. The software would have to be maintained on secure workstations and the staff trained to process credit card payments.
  • Funds can take up to four days before they are received. Credit card companies do not remit funds immediately upon charging a cardholder’s card. The funds can take up to four business banking days to show on the payee’s account. Therefore, disbursements would not be able to be made immediately at or after closing.
  • The credit card company deducts their fee from the payment. When the payment is credited to the designated bank account, it is not for the full amount of the charge. The credit card company retains its percentage fee from each transaction. The title company would have to move money from their operating account to the designated bank account in order to make the deposit whole.
  • Down payment and closing costs usually exceed the credit card limit. The average credit card limit is $5,000 while the average down payment and closing costs far exceed the limit, making the use of a credit card to remit payment not feasible.

The Difference Between Grant Deeds and Quitclaim Deeds

Deeds are documents that pass real estate from a current owner to a new owner. A deed is not a contract of sale where money changes hands when ownership changes. A deed is a document that conveys ownership without disclosing anything except the property description, location, name of previous owner and name of new owner.

General Facts

All-Inclusive Document

In acknowledgment of the transfer of a piece of property, a deed tells the new owner the location of the property:

  • True address
  • Coordinates of property
  • Shape and size of the property
  • Names of previous and new owners

Some deeds use metes and bounds to describe the boundaries and identify locations of in-ground monuments, property lines, and closest landmarks- if they exist. The document identifies who is surrendering the property (grantor) and who is accepting it (grantee). Most counties in the continental United States also require the addresses of all parties participating in the property exchange.

Status of Deed Information

Every piece of information on a deed must be accurate. This includes the legal description and coordinates of the property. An incorrect statement here could lead the new owner to place a shed or a fence on neighboring property.

People’s names are the common mistakes, especially in the case of a single woman owner who marries and decides to sell the property. Her name must identify her by the name in use when she was single as well as the name she took when she wed. Failure to do this leaves a “cloud” on the deed and the title of the property.

Grant Deed v. Quitclaim Deed

There are two types of deeds: a quitclaim deed and a grant deed. Both are used to transfer property title to a new owner and neither of them carries any information as to the sales price, mortgage loans, taxes or any other financial information. While they have similar functions, they offer different levels of protection to the recipient. A signed and witnessed version of either the grant deed or quitclaim deed is required to complete a real estate transaction.

Grant Deed

House DeedCreated and signed by the seller at the closing of a real estate transaction Includes a full legal description of the subject property Verifies that the seller owns clear title to the subject property Guarantees that the property is clear of liens and encumbrances The seller signs the deed and is considered the grantor or transferor The individual receiving the deed is the grantee or transferee. Grant deeds can be backed by title insurance that would protect the new property owner against future claims on the property.

Quitclaim Deed

quitclaim deedThe quitclaim deed is created when the subject property is not a part of a traditional sales transaction but to transfer any interest in the property to a recipient/grantee. A quitclaim deed may be used to convey property as a gift, through a will or by a third party that is legally responsible for the property.

Quitclaim deeds may also be used by grantors to convey the property to a spouse, for example, in a divorce.

A quitclaim deed does not contain a title covenant and therefore offers no warranty regarding the current status of the legal title. Quitclaim deeds are not backed by a title insurance policy and therefore offer a lower level of protection for the grantee.

New Real Estate Laws for 2018 – Part 1 of 3

Our legislators passed 41 bills affecting the real estate business last year. This is part 1 of our 3-part summary of those bills. For the full text of a law visit http://leginfo.ca.gov/ for California laws – or – http://www.gpo.gov/fdsys/ for federal laws. A legislative bill may be referenced in more than one section.

BROKER PRACTICE TRUST FUNDS Brokers now have a choice of whether to use fidelity bonds or insurance to cover their unlicensed employees who are authorized to withdraw money from the broker’s trust fund accounts. Previously, the broker was limited to bond coverage. This law further clarifies exactly which wrongful employee acts must be covered. Whether it’s a bond or insurance, it must protect the broker from intentional wrongful acts committed by an employee of that business, including theft, dishonest acts, or forgery. Senate Bill 764 codified as Business & Professions § 10145. Effective January 1, 2018.

RampDISCLOSURES Existing law requires a “commercial” property owner or lessor to state on every lease form or rental agreement executed on or after January 1, 2017, whether or not the premises have undergone inspection by a Certified Access Specialist (CASp). This new law defines commercial property as, among other things, a place of lodging such as an inn, hotel or motel and other short-term rentals with amenities similar to a hotel, motel or inn. AB 1148 codified as Civil Code § 1938. Effective July 22, 2017.

DISCLOSURES – HOA An HOA must disclose directly to sellers on the billing form (C.A.R. Form HOA2) that the seller is not required to purchase all of the listed documents but may provide the buyer, at no cost, current copies of any of the disclosures that the seller already has. Moreover, the annual budget report must individually identify the cost of each separate disclosure document on the billing form for the mandatory disclosures. Managers must disclose to the HOA whether they receive a referral fee or other benefit from a third party who provides disclosure documents, and must provide a written acknowledgement that the disclosure documents are the property of the association and not those of the manager or the manager’s firm. Finally, this law creates a legal obligation for the manager to facilitate delivery when contractually obligated to do so. Assembly Bill 690 codified as Business and Professions Code § 11504 and Civil Code §§ 4528, 4530, 5300, 5375, 5375.5 and 5376. Effective January 1, 2018.

DISCLOSURES MEAGAN’S LAW This law establishes 3 tiers of sex offender registration based on specified criteria, for periods of at least 10 years, at least 20 years, and life, respectively (with different periods for juvenile court). It establishes procedures for termination from the sex offender registry for a registered sex offender who is a tier one or tier two offender and who completes his or her mandated minimum registration period under specified conditions. Senate Bill 384 codified as Penal Code 290, 290.006, 290.008, 290.45, 290.5, 4852.03, 9002 and 13125. The effective date is January 1, 2021.

Roofing InspectionDISCLOSURES LIABILITY EXEMPTION The law currently exempts an agent from liability for having provided various types of reports prepared by an expert where the report is in error. This new law adds a report prepared by a C-39 roofing contractor to the list of reports for which an agent is exempted from liability for any error in information disclosed upon transfer of residential real property. Assembly Bill 1357 codified as Civil Code § 1102.4 and Business and Professions Code § 7197. Effective January 1, 2018.

DISCLOSURES PRIVATE TRANSFER FEES This updates the Private Transfer Fee (PTF) disclosure law to inform homebuyers of the FHA and FHFA regulations relating to PTFs and how those regulations may impact the ability to obtain financing. The notice must be part of a separate disclosure document recorded by the person or entity imposing the transfer fee as a condition of payment. PTFs are fees, typically imposed by a builder, which require the buyer and any subsequent purchaser to pay a fee upon the transfer. In 2012, the Federal Housing Finance Agency (FHFA) adopted a rule for Fannie Mae and Freddie Mac backed mortgages requiring that the funds generated by any PTF provide a “direct benefit” to the encumbered property (PTFs established prior to the date of the rule are “grandfathered”). Federal law now requires the Federal Housing Administration (FHA) to adopt the same rule regarding PTFs. Thus, PTFs can create difficulties in the financing of real property sales which must be disclosed. Assembly Bill 1139 codified as Civil Code § 1098.5. Effective January 1, 2018.

EMPLOYMENT CRIMINAL HISTORY Employers cannot ask up-front for information regarding criminal history, but may only request this information after the applicant has received a conditional offer of employment. Neither arrests that did not lead to a conviction nor expunged convictions can be considered at all. Employers may not deny an applicant for a job unless the conviction directly impacts the job duties. A denial letter must cite the conviction and give the applicant five days to contest its accuracy and/or provide other evidence of mitigating circumstances. Assembly Bill 1008 codified as Government Code § 12952 and repeal of Labor Code § 432.9. Effective January 1, 2018.

EMPLOYMENT GENDER IDENTITY Requires that employers with 50 more employees include, as a part of the existing sexual harassment training, training on harassment based on gender identity. A transgender rights poster, to be developed by the DFEH, must be posted in a prominent location. Senate Bill 396 codified as Government Code §§ 12950 and 12950.1 and Unemployment Insurance Code §§ 14005 and 14012. Effective January 1, 2018.

EMPLOYMENT MATERNITY LEAVE Provides 12 weeks of unpaid maternity or paternity leave for Californians who work for companies with 20 – 49 employees and protects these new parents from losing their jobs and health care benefits. Senate Bill 63 codified as Government Code § 12945.6. Effective January 1, 2020.

EMPLOYMENT SALARY HISTORY Prohibits all employers from seeking salary history information about an applicant for employment and requires an employer to provide the pay scale for a position to an applicant upon reasonable request. Assembly Bill 168 codified as Labor Code § 432.3. Effective January 1, 2018.

Graphic:  DRE LogoGOVERNMENT The Bureau of Real Estate (CalBRE) is returned to its standing as the Department of Real Estate (DRE). Formerly under the Department of Consumer Affairs (DCA), the DRE will now be directly under the Business, Consumer Services, and Housing Agency (BCSH). Senate Bill 173 codified as Business and Professions Code §§ 30, 101, 10004, 10005, and 10050 and Government Code § 12804. Effective July 1, 2018.

HOA DISCLOSURES An HOA must disclose directly to sellers on the billing form (C.A.R. Form HOA2) that the seller is not required to purchase all of the listed documents but may provide the buyer, at no cost, current copies of any of the disclosures that the seller already has. Moreover, the annual budget report must individually identify the cost of each separate disclosure document on the billing form for the mandatory disclosures.

Managers must disclose to the HOA whether they receive a referral fee or other benefit from a third party who provides disclosure documents, and must provide a written acknowledgement that the disclosure documents are the property of the association and not those of the manager or the manager’s firm. Finally, this law creates a legal obligation for the manager to facilitate delivery when contractually obligated to do so. Assembly Bill 690 codified as Business and Professions Code § 11504 and Civil Code §§ 4528, 4530, 5300, 5375, 5375.5 and 5376. Effective January 1, 2018.

HOA – SOLAR ENERGY SYSTEMS Prohibits an association from establishing a general policy prohibiting the installation or use of a rooftop solar energy system for household purposes on the roof of the building in which the owner resides, or a garage or carport adjacent to the building that has been assigned to the owner for exclusive use. Assembly Bill 634 codified as Civil Code 714.1, 4600 and 4746. Effective January 1, 2018.

Swimming Pool SafetyHOME INSPECTORS SWIMMING POOL SAFETY New pools must be constructed with at least two of seven drowning prevention safety features (as opposed to the current one) for a private single-family home. The exemption for localities that have their own pool ordinances is eliminated. In regard to home inspectors, it requires them to include within their inspection a noninvasive physical examination of the pool or spa for the purpose of identifying which of the seven drowning prevention safety features the pool or spa has. This information must then be included in the home inspection report. This law does not create any new disclosure obligation on the part of agents. Senate Bill 442 codified as Business and Professions Code § 7195 and Health and Safety Code §§ 115922 and 115925. Effective January 1, 2018.

Severely and Permanently Disabled Resident Exclusion

Proposition 110

Proposition 1101 is a constitutional initiative passed by California voters that provides property tax relief for severely and permanently disabled claimants when they sell an existing home and buy or build another. It allows the transfer of the base-year value of their existing home to a newly purchased or constructed home within select counties in the State of California. In addition, the initiative also provides relief for modifications that make a home more accessible for a severely disabled person.

Who Qualifies?

If you or your spouse that lives with you are severely and permanently disabled2, you can buy a home of equal or lesser value than your existing home and transfer the trended base year value of your existing home to your new property. Also, you can modify your current home as long as the modifications directly satisfy disability requirements.

The transfer of a trended base value from one property to another is a one-time benefit only. You must buy or newly construct a replacement property within two years of the sale of the original property. Both the original property and the replacement property must be your principal place of residence, and you must file your claim within three years to receive retroactive relief following the purchase or completion of new construction of your replacement property. Once you have filed and received this tax relief, neither you nor your spouse who resides with you will qualify to receive this benefit again.

If a person has been granted a Proposition 60/90 benefit and subsequently becomes severely and permanently disabled, he/she may also qualify for a Proposition 110 benefit.

1 For expanded definitions of Proposition 110, see Revenue and Taxation (R&T) Code Sections 69.5 and 74.3. It is available online at  www.boe.ca.gov/proptaxes/faqs/propositions110.htm.

2 The Revenue and Taxation Code defines “a severely and permanently disabled person” as any person who has a physical disability or impairment which results in a functional limitation as to employment, or substantially limits one or more major life activities of that person, and which has been diagnosed as permanently affecting the person’s ability to function.

Eligibility Requirements

  1. Both your original and replacement property must be eligible for the homeowners’ or disabled veterans’ exemption and the replacement property must be your principal residence.
  2. The replacement property must be of equal or lesser “current market value” than the original property. The “equal or lesser” test is applied to the entire replacement residence, even though the owner of the original property may acquire only a partial interest in the replacement residence. Owners of two qualifying original residences may not combine the values of those properties in order to qualify for a Proposition 110 base-year transfer to a replacement residence of greater value than the more valuable of the two original residences.
  3. The replacement property must be purchased or built within two years (before or after) of the sale of the original property.  To receive retroactive relief from the date of transfer, you must file your claim within three years following the purchase or completion of new construction of the replacement property.  A claim that is filed after the three-year filing period may receive the benefits commencing with the lien date of the assessment year in which the claim is filed.
  4. You or a spouse residing with you must be severely and permanently disabled when the original property was either sold or modifications were completed.
  5. The disabled person, spouse or legal guardian must submit a Physician’s Certificate of Disability (Form OWN-107)with the claim.

Office

Frequently Asked Questions

My original home is located outside Los Angeles County, but my replacement home is in Los Angeles County. Do I qualify for relief?

Yes.

I plan to relocate from Los Angeles County to another county. Do I qualify for relief?

You may qualify for relief. As of June 5, 2015, the following counties in California have an ordinance enabling Proposition 110:

  • Alameda
  • El Dorado
  • Los Angeles
  • Orange
  • Riverside
  • San Bernardino
  • San Diego
  • San Mateo
  • Santa Clara
  • Tuolumne
  • Ventura

Since the counties indicated above are subject to change, we recommend contacting the county to which you wish to move to verify Proposition 110 eligibility.

Do all replacement homes qualify?

If you meet all other eligibility requirements, relief is granted for single family residences, condominiums, units in planned developments, cooperative housing, community apartments, manufactured homes subject to local real property tax, and living units within a larger structure consisting of both residential and non-residential accommodations.

If I make an improvement to my replacement home within two years of purchase, can I get additional tax relief for the new construction?

Yes, as long as the total amount of your purchase and the new construction does not exceed the market value of the original property at the time of its sale..

What does “equal or lesser value” of a replacement property mean?

The meaning of “equal or lesser value” depends on when you purchase the replacement property. In general, equal or lesser value means the following:

100% or less of the market value of the original property if a replacement property is purchased or newly constructed before the original property is sold, or

105% or less of the market value of the original property if a replacement property is purchased or newly constructed within the first year after the original property is sold, or

110% or less of the market value of the original property if a replacement property is purchased or newly constructed within the second year after the original property is sold.

When making the “equal or lesser value” test it is important to understand that the market value of a property is not necessarily the same as the sale/purchase price. The Assessor will determine the market value of each property. If the market value of your replacement property exceeds the “equal or lesser value” test, no relief is available. It is “all or nothing” with no partial benefits granted.

If I qualify for Proposition 110 benefits, do I still need to file for a Homeowners’ Exemption on the replacement property?

Yes. Homeowners’ exemptions are not automatically granted.

Does the owner of a home that is modified to make it more accessible need to be disabled to qualify for Proposition 110 benefits?

No. The severely and permanently disabled person need only be a permanent resident of the dwelling.

What tax relief is available for homes modified to improve accessibility?

If qualified, the value of the improvement, addition, modification, or feature that specially adapts a home’s accessibility for a severely and permanently disabled person is excluded from property tax assessment.

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