Common Ways of Holding Title in California

First-time homebuyers face a bewildering array of vesting options. They may reach out to you, as a real estate professional, for guidance on what those options are and what they mean.

Rather than trying to remember the ins and outs of each option, provide them with this flyer. It will only enhance your reputation as the go-to person for all things real estate.

California’s Proposition 19

Proposition 19 significantly changes certain property tax transfers, exemptions and revenue for Wildfire Agencies and Counties.

Specifically, primary residents over 55 may now carry their current tax assessments to a replacement residence in any California county.

Also, Parent-to-Child exemptions are limited to the first $1 million of value over the parent’s assessed value. The exemption is also limited to only primary residences of both the parent and child.

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.

Click on the Flyer to Download it.

Stay Savvy - Stay Safe Anon

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.