Latest Writings

Why Revocable Living Trusts are Often Not Necessary

Clients often think that they need a revocable living trust for estate planning purposes, this is an excellent article put out by the Maryland State Bar Association explaining why, in most cases, they are not necessary: http://www.msba.org/…/estate-tru…/articles/livingtrusts.aspx

Posted on 17 October '17 by , under Blog. No Comments.

Understanding Maryland Non-Resident Withholding on Real Estate

In the past nine years of practicing law in Maryland, specifically real estate in Deep Creek lake I have become very familiar with the Maryland Non-Resident Withholding tax.

As a general matter, when you sell real estate and you realize a gain, absent the home being your principal residence that you owned for 2 of the past 5 years (see IRC 121 discussion below) or  a “1031 like-kind exchange”, you will need to pay both federal and state capital gains tax (the state rate depending on which state) on the gain. 

Maryland has 2 large vacation areas Deep Creek Lake and Ocean City, where a large proportion of the sellers tend to be out of state residents.

Maryland decided that, rather than relying on these out of state sellers to remember to file a Maryland State Tax Return for the year in which they sell real estate (to pay the state capital gains tax on the gain from the sale), they would reverse the burden and withhold an amount at closing intended to cover the capital gain tax. 

As of March 2016 this rate is 7.5% for individuals, 8.25% for non-resident entities (e.g. a Virginia LLC not registered to do business in MD). 

The test for whether one is a resident of Maryland is similar to that of the Federal Tax Code, i.e. they are presently domiciled in Maryland (a good indicator of this is to check the address that is listed as the mailing address for the property in SDAT’s records).  Note that it is not the title agent’s responsibility to report whether the seller is a resident or non-resident, it is the seller’s responsibility when they sign the Certification of Exemption From Withholding Upon Disposition of Maryland Estate Affidavit of Residence or Principal Residence wherein they affirm that they are a resident of Maryland. 

In addition, Maryland tracks IRC 121 which says that if someone lived in the property as their principal residence for 2 of the past 5 years , they are equally exempt from withholding. 

Its important to note that this is not a new or additional tax, just a reversal of when it is typically paid, and that it is only applicable when there is a gain.  In other words if the seller is selling at a loss (calculated by subtracting the adjusted cost basis (what they paid for the property, plus any improvements, less any depreciation), from the sales price, no state capital gains tax would be due. 

If there is no gain or so slight of a gain that the withholding rate would result in a refund being owed, the seller has 3 options:

  1. If they are within 21 days of closing, they may file form MW506AE, an Application for Certificate of Full or Partial Exemption http://forms.marylandtaxes.com/16_forms/MW506AE.pdf (the certificate would then be sent to the seller or title office showing that they are either fully exempt or eligible for a reduced withholding amount;
  2. If they miss the 21 day window they may,once 60 days have passed since the deed was recorded, file form MW506R, an Application for Tentative Refund of Withholding http://forms.marylandtaxes.com/15_forms/MW506R.pdf;
  3. If they fail to do either of the above, they may wait until the following year and file a Maryland State Tax Return for the year in which they sold real estate to receive their refund. 

More information can also be found here:  http://forms.marylandtaxes.com/current_forms/Withholding_requirement.pdf

As always individual circumstances may vary so I encourage you to consult your CPA regarding these potentially complex issues.

Posted on 15 March '16 by , under Blog. No Comments.

Buying a Bank-Owned Property? Know That the Choice of Your Title Agent is YOURS

Who a buyer uses to handle his/her settlement, in Maryland, is completely the buyer’s choice.  Maryland Law provides so in several relevant provisions in the Maryland Code:  § 17-524, § 17-607, and § 17-322 of the Business Occupations and Professions Article.

In addition, in all states, Federal Law, specifically § 9 of the Real Estate Settlement and Procedures Act (RESPA),  provides that a seller is prohibited from “requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale. Buyers may sue a seller who violates this provision for an amount equal to three times all charges made for the title insurance.”

Notwithstanding these provisions, unfortunately, sellers in some instances will seem to insist that you close with their title company.

On REO properties, or in other words property that has been foreclosed upon and now is “bank owned”, bank sellers outsource title tasks on their end such as getting the deed executed by the right person and delivered and reviewing the HUD-1 to a title company.  Several of these title companies used by REO sellers specialize in representing the seller’s or bank’s side of the transaction.  In regards to Garrett County and nearby properties, these companies are typically located in and around the D.C./Baltimore region, and while they possess expertise regarding the bank’s end of the transaction they usually possess little if any local knowledge or expertise in regards to local real estate customs and idiosyncrasies.

In most instances, and as has been the tradition in Maryland over the years, the bulk of the work in the closing, such as a title search, examination, coordination with the lender, issuance of a title commitment and final title policy, are most often completed by the title company or attorney chosen by the buyer.  However, it seems as though lately the bank’s title companies are increasingly pressuring buyers, as well as real estate agents and lenders, to perform the buyer’s side of the closing services as well.

As stated above it is illegal for the seller (whether it is an individual or a bank) to require the use of an a particular title company, no matter what is stated in the preprinted bank addendum that buyers receive in response to an offer on REO property.  While requiring use is per se illegal, RESPA has been construed to permit these bank-affiliated title companies to incentivize buyers to use them.  In other words, while seller’s title company cannot require use, they can for example offer to pay for the buyer’s owners title policy.

However, buyers must consider whether this cost savings is worth using a title company affiliated with the seller given the obvious conflict of interest.

I have heard comments from buyers who are considering letting seller’s title company represent buyer’s interest as well as desiring to “keep the transaction simple,” however any experienced title office is well-versed in coordinating with REO title companies given the state of the market over the past several years.  I would suggest that this line of thinking would be akin to a spouse in a divorce agreeing to be represented by the other spouses’ attorney so as to “keep things simple.”  In my opinion, the purchase of real estate is a significant and important-enough event that requires independent representation.

Posted on 24 October '11 by , under Blog. No Comments.

What A Borrower Can Expect When Applying for A Loan in Today’s Lending Environment

There is no question underwriting over the past few years has become much more strict, some might even argue too strict, as a reaction to the fallout from the more laxed underwriting standards during the housing boom.  Borrowers in the current lending environment need to be prepared to provide much more information and documentation than was the case in those years.  An unprepared borrower can cause delays in closing, because they might, understandably, not feel an urgency to provide information and documentation right way for a loan that is closing in 45 days, however, borrowers need to realize that delaying in providing this information can result in a delayed closing.  The following is intended to educate borrowers on what they can expect to be requested when they are applying for a loan.  Every lender or loan program will have different requirements, but this is a general idea of what will be required today:

 

  • Legible copy of driver’s ID and occasionally copy of social security card.
  • Explain any credit inquiries on credit report w/in last 6 months in a signed letter
    • If new credit was opened and not yet visible on the credit report, a copy of the credit documents and a recent billing statement may be needed
  • Explain any derogatory credit in a signed letter
  • Borrowers should not to open any new credit during this process or increase any current debt
  • Provide proof of any tax liens or judgments noted on credit report are paid off
    • If unpaid, they’ll need to be paid before or at settlement with appropriate releases obtained
  • Provide minimum of 2 year residency
  • Provide address used when filling most recent 2 years tax returns
    • Most income is audited and can be rejected if the address used when applying doesn’t match the tax return filed
  • If any open debt is loans that the borrower is a co-signor, proof that the payments are made by the responsible party should be presented for the past 12 months (canceled checks).  Documentation is very important to eliminate the debt from the debt to income ratio calculation
  • Employment history for a minimum of 2 years
    • W2 wage-earners provide:
      • W2’s for 1-2 years (depending on their loan program)
      • Most recent month’s paystubs
    • Self-employed borrowers provide:
      • 2 years full tax returns with all schedules
      • If own 25% or more in their business, business tax returns with all schedules
  • If changing jobs, a signed employment letter will be needed signed by employer and borrower
  • If renting:
    • The landlord’s name, address, phone number and amount of monthly rent is needed
      • If no rent obligation, then a letter from landlord or family member noting the date residency began and verify rent is free
      • A verification of rent is often used to verify rent paid but also 12 months of cancelled checks may be required
  • Separation/Divorce
    • Separation and divorce agreements may be required
    • If child support is an obligation, ages of dependents will be needed
      • If not noted in the agreement, copy of birth certificates may be required
      • This obligation is important since it is added to other moth debts for debt to income ratios
    • The recipient of alimony or child support can choose whether to include as income, but must be verified if to be included and should continue for a minimum of 3 years
  • Manufactured Homes
    • Proof of existence or nonexistence of the title or certificate of origin will be required in most cases
    • Manufactured homes have HUD seals on the home and these must still be in place
      • It is helpful to keep a photograph of the seal in your file in case needed as well as DMV title if applicable
    • The manufactures phone number and address are also helpful in case title cannot be located and DMV does not show issuance of title
    • The certificate of origin may then need to be located if no DMV title
    • These homes must have the axle and wheels removed and either have a continuous block foundation or concrete piers (depending on lender)
    • For FHA loan purposes the home can be a singlewide or doublewide but must be 1976 or newer

 

 

Posted on 24 February '11 by , under Articles. No Comments.

A Primer On The Effect of Real Estate on Taxes

A Primer On The Effect of Real Estate on Taxes
  • Any time you sell real estate it is a taxable event (i.e. a form 1099 is sent to the IRS reporting the sale and price)
  • Capital Gains
    • A capital gain is any “profit” from the sale of an asset held for investment or real estate (the gain isn’t “realized” for tax purposes until the asset is sold)
    • A capital gain can be Long Term or Short Term
      • “Short Term” assets are those held for less then 1 year
        • These are taxed at the taxpayer’s ordinary income level
      • “Long term” assets are those held for more than 1 year
        • These are taxed at the capital gains rate (15% for most taxpayers until 2010)
    • All capital gains must be claimed on income taxes
    • Note:  “capital losses” may be claimed as well (i.e. a loss on the sale of an asset)
    • Note:  there is a state capital gains tax as well
  • A taxpayer’s “basis”
    • A “basis” is generally what the taxpayer paid for the asset
    • The basis can be “adjusted” (up or down) however in certain circumstances:
      • Improvements:  (e.g. taxpayer purchases a home in 2008 for 200k and makes 30k worth of improvements in 2009, the taxpayers “adjusted basis” is 200k + 30k = 230k.
      • Depreciation:  (e.g. taxpayer purchases a rental apartment in 2008 and takes depreciation deductions in 2009 and 2010, when he sells the apartment in 2011 his basis will be adjusted down to “recapture” those depreciation deductions taken earlier)
      • Note:  there are other scenarios where basis will be adjusted
        • e.g. Disposition –if you take title to a property via disposition (i.e. by will or intestacy) you will receive a “stepped up” basis (i.e. your basis will be the market value of the property on the day you took title, as opposed to the likely lower basis of the decedent) IRC 1014
          • However, Gifts – if you take title to a property via gift you do not receive the benefit of the “stepped up” basis (i.e. you must use the basis of the donor)
          • Moral:  its better to leave a property by inheritance than it is to gift shortly before death!
  • Capital gains are determined, generally, by this formula:  adjusted sales price – adjusted basis = capital gain
  • IRC 121 exception
    • IRC 121 states that a taxpayer may exclude (i.e. not include as income on tax return) 250k of gain (500k if filing jointly) if they have owned and occupied the property as their principal residence for at least 2 of the preceding 5 years
      • *IRC 121 can only be used once every 2 years
  • IRC 1031 exchanges
  • Section 1031 is a provision in the tax code which allows a taxpayer to defer paying tax on capital gains if the asset is exchanged for another “like kind” asset.
      • like kind” refers only to the asset class, i.e. real estate for real estate
        • e.g. exchanging a farm for a condo is still “like kind” however exchanging a farm for X company’s stock is not, and is taxable
          • *note:  non-U.S. property is not “like kind”
      • Example of 1031 Exchange:
        • Investor buys a commercial property for 200k.  After 6 years he could sell the property for 250k, which would result in a capital gain of 50k (which at 15% would mean he would have to pay $7,500 in Fed CG taxes).  However, if he follows the rules of section 1031 and purchases a replacement property he will be due no taxes, as that capital gain tax will be deferred.  
      • Proceeds from sale of the relinquished property cannot go to the exchanger, they must be placed in trust with the Qualified Intermediary (QI)
      • Time requirements are critical (from Starker vs. U.S. ( 602F.2d 1341))
        • Taxpayer must identify the “replacement property” within 45 days of closing on the “relinquished property”
        • Taxpayer must acquire the replacement property within 180 days of closing on the relinquished property
          • No exceptions:  i.e. 180th day is a holiday does not permit an extension
          • *identified replacement property that is destroyed after the 45 day identification period doesn’t not entitle exchanger to identify a new property
      • Both the relinquished and the replacement property must be held for investment or for productive use in a trade or business (i.e. personal residence cannot be exchanged).
        • IRS uses totality of the circumstances approach in analyzing whether property is held for investment (i.e. one factor alone, such as renting the property, is not necessarily dispositive)  
        • So how much personal use is too much for 1031?  (See Gary’s attached memo re: new IRS Safe Harbor)
      • Any money (called “boot”) that doesn’t get reinvested into the replacement property will be taxed.
      • *remember capital gains taxes are deferred but NOT ELIMINATED, i.e. as long as the $ is reinvested in real estate the tax is deferred but once there is a sale without a 1031 exchange the tax will be due
    • 1031 Timeline:
      • Step 1:  retain tax counsel/CPA (who can serve as QI)
      • Step 2:  Enter into contract to sell relinquished property –contract to include cooperation clause
      • Step 3   Enter into 1031 Exchange Agreement with QI in which QI is named as principal in the sale of relinquished property and purchase of the replacement property.
        • *normally QI will be listed on the HUD-1s, but both deeds will reflect the exchanger (direct deeding)
      • Step 4:  the relinquished sale closes, proceeds go to QI
        • This is day 0 of both the 45 day identification period and 180 exchange period
      • Step 5:  written identification of replacement property sent to QI w/in 45 days
      • Step 6:  Enter into contract to purchase replacement property (again with cooperation clause)
      • Step 7:  the replacement purchases closes prior to the 180th day, QI forwards exchange funds and growth proceeds to settlement agent.  A final accounting is sent by the QI to the exchanger.
      • Step 8:  Taxpayer files IRS form 8824 when taxes are filed, as well as the applicable state form

    • Common Pitfalls
      • –Investors don’t hold their properties for investment or business use
        • Taxpayer’s intent must be to hold the replacement property for investment or business use.  There is no bright line IRS guidance as to how long you must hold the property for investment or business use, but CPA’s generally advise 2 years prior to “conversion” to personal use (i.e. before you can move into the home as your principal residence).  Otherwise, the IRS may disallow the exchange for failure to have the appropriate investment intent.
        • If taxpayer were to move into his 1031 replacement property (after 2 years) new IRS rule says that taxpayer must wait 5 years until he can sell the property and utilize IRC 121 (i.e. IRC 121 cannot be claimed if the sold property was subject to a 1031 exchange w/in the past 5 years)

*DISCLAIMER: the above information is provided as a summary only and should not be relied upon as individual legal or tax advice.  Every individual’s particular financial situation is unique and the advice of a competent CPA who is aware and understands the individual’s particular situation is strongly recommended.

Posted on 18 February '11 by , under Articles. No Comments.

The Maryland Dormant Mineral Interest Act

A hot topic in Garrett County lately is the Marcellus Shale formation and the possibility of drilling for natural gas within Garrett County.  For more information on Marcellus Shale see here and specifically in Garrett County here.  With this in mind, an important piece of legislation was passed this past October that provides land owners with a means to reclaim the mineral interests associated with their property, even if those mineral interests were conveyed out or leased many years ago.

When one owns real property, commonly we think that ownership relates to the surface of the property and any improvements thereon.  However, unless otherwise divested or “severed”, an owner of real property also owns the subsurface or mineral interests as well.  These interests can be very valuable if the minerals, such as the natural gas found in the Marcellus shale formation, are able to be extracted by a mining or drilling company.

Unfortunately, because many mineral severances occurred so long ago, as early as the mid 1800’s- even before Garrett County was founded (1872), it can be nearly impossible to determine conclusively whether a surface owner owns his/her mineral interests.  While one might look for this information in his/her deed, whether or not the deed refers to any exceptions of mineral rights is not necessarily dispositive as those rights may have been conveyed out years ago but not carried forward in each successive deed.

Because of this problem, and also likely because of the expectation that litigation regarding mineral interests will increase in correspondence with their value, Maryland, along with several other states, has codified the “Dormant Mineral Interest Act” (specifically, Section 15-1201 et. Seq. of Title 15 in the Maryland Code).

The term “dormant” under the Act means that the mineral interest was “unused for a period of 20 years” and further, that no “[n]otice of the mineral interest” was recorded during the 20 year period.

“Use” of a mineral interest under the Act is defined as either:

(1)    “Active mineral operations on or below the surface of the real property or other property utilized or pooled with the real property, including production, geophysical exploration, exploratory or developmental drilling, mining, exploitation, and development of minerals”; or

(2)    “Recordation of an instrument that creates, reserves, or otherwise evidences a claim to, or the continued existence of, the mineral interest, including an instrument that transfers, leases, or divides the interest”; or

(3)    “Recordation of a judgment or decree that makes a specific reference to the mineral interest.”

The Act  permits surface owners, on or after October 1, 2011, to file an action with the Circuit Court in the county where the property is located to terminate a dormant mineral interest.  The rationale behind the 1 year period until an action may be filed was designed to permit mineral interest owners time to identify and record notices of the interests as stated above so as to preclude  actions  against their interests.

This action must be in the nature of a quiet title action (pursuant to section 14-108 of the Real Property Article).

In the instance where a surface owner knows that the mineral interest associated with his/her surface property has been severed, but does not know who owns those mineral interests, a procedure is available whereby a court appointed trustee for the unknown or missing owner will hold the mineral interest in trust for a period of 5 years.  If, during the 5 year period and upon publication, the unknown or missing owner does not come forward to claim his/her mineral interest, the court may, upon petition, order to terminate the trust and convey title of the severed mineral interest to the surface owner.

Especially in light of the abundance of minerals below the surface of Garrett County, and also because of the complex nature and legal ramifications relating to mineral interests, both surface owners and mineral interest owners would be wise to engage experienced legal counsel with regard to these important, and potentially very valuable, interests.

-Gary Sabo

Posted on 6 January '11 by , under Articles. No Comments.

Maryland’s New Power of Attorney Law

Effective October 1, 2010, a new law regarding powers of attorney, known as “Loretta’s Law” (named after Loretta Soustek, an elderly woman who’s life savings was stolen by her niece using an unattested power of attorney) has gone into effect and greatly changed the law in Maryland regarding what a power of attorney must contain.  The act is known as the Maryland General and Limited Power of Attorney Act (Annotated Code of Maryland, Estates and trust Article, §§’s 17-101 to 17-204).  For more on Loretta Soustek’s story see here.

The biggest change in the new law is requirement of the attestation of two witnesses to the principal’s signature.  The notary may be one of the witnesses.  Previously in Maryland no witnesses were required.  The new law is an example of a nationwide trend to standardize and strengthen the requirements regarding powers of attorney (POAs).  A similar law was passed in Pennsylvania several years ago.

Specifically the act requires that POAs executed on or after October 1, 2010 be:

  • In writing;
  • Signed by the principal or by some other person for the principal, in the presence of the principal, and at the express direction of the principal;
  • Acknowledged by the principal before a notary public; and
  • Attested and signed by two or more adult witnesses who sign in the presence of the principal and in the presence of each other; the notary may serve as one adult witness

While Maryland’s Act does not, like Pennsylvania, require the attorney-in-fact to certify as to the validity of the power of attorney and agent’s authority (i.e. the agent to sign that they are not aware of any disability of or revocation by the principal), such AIF certification is wise when available to insure credibility and prevent any later attack as to the validity of the POA.

As had been the law in Maryland, any POAs executed with regards to a recorded instrument (e.g. deed, deed of trust, etc.) must be recorded in land records themselves.

Powers of attorney executed in a state other than Maryland and military powers of attorney will be valid and enforceable in Maryland as long as they comply with the applicable state/military requirements for a POA at the time it was executed.

While statutory forms (a 20 page General Personal Financial POA and a 6 page Limited POA) were provided with the new law, and can be found here under the aforementioned code sections,   the forms are very long and can be somewhat confusing.  Anyone contemplating the use of a power of attorney is strongly encouraged to seek competent legal counsel  who is able to craft a document tailored to the principal’s particularized circumstances and needs.

Gary E. Sabo, Esq.

Posted on 6 October '10 by , under Articles. No Comments.

Understanding the Value of Title Insurance

Title insurance is an often misunderstood but critical product one purchases when buying a home. While title insurance is sometimes criticized for being too expensive, one should understand that the cost of the title insurance premium that a buyer pays at closing is a one-time payment that covers the property as long as the home is owned.  Contrast this with other lines of insurance such as homeowners or hazard insurance in which the homeowner pays an annual premium.

When one considers the risk of a loss due to fire vs. the risk of a loss due to a title defect, the value of title insurance becomes more clear:

Consider for example that according to the examiner.com, the chances of a U.S. homeowner’s home burning down is .08% or 1 in 1250.  According to the American Land Title Association, title defects are found in about 36% of all real estate transactions or 1 in 27.

Consider also that in this comparison, there is a greater potential for loss from a title defect than from a house fire.  When a home is lost due to fire, the home must be rebuilt but the land’s value remains.  However, with a total failure of title both the home and the land would be lost.

However, according to insurancequotes.com the average cost of an annual insurance premium on a $300,000 home is $1,000-$1,500.  Over the course of a 30 year mortgage, the homeowner’s total cost of homeowners insurance would be $30,000 – $45,000 and this is assuming insurance rates never rise.    In Maryland, the cost of an owner’s title insurance policy on a $300,000 home is approximately $1,100 which again is paid only once and provides coverage as long as the home is owned.

With the various other closings costs a buyer pays at closing such as lender’s fees, transfer taxes, escrow reserves, prepaid interest etc., title insurance can sometimes get overlooked, but from a cost-benefit analysis standpoint, as illustrated above, title insurance serves a critical role in protecting most Americans’ most valuable asset.

Gary E. Sabo, Esq.

Posted on 4 October '10 by , under Articles. No Comments.

What is “investment property” for purposes of a 1031 “Like Kind” exchange?

by Gary E. Sabo, Esq.

In 2008, the IRS issued IRS Revenue Procedure 2008-16, which provided long awaited guidance and a “safe harbor” for vacation home owners seeking to facilitate a 1031 exchange, but who are unclear whether or not their vacation home classifies as “investment property”.

For background, a 1031 exchange (named after the section of the IRS Code which created it, also known as a “Starker Exchange) allows an investor to defer capital gains taxes on the sale or exchange of an asset in limited circumstances where the proceeds from the sale of the asset are directly reinvested into a replacement asset.  In real estate, the 1031 exchange has become a very popular tool for investors who seek to avoid capital gains taxes on the sale of real estate.

However, 1031 exchanges are only permitted by the IRS on so-called “investment property.”  In other words, a property that is rented 100% of the time would easily be considered an investment property, however, where the owner used the real estate for personal use, as well as investment, there has always been uncertainty as to how much personal use is too much for the IRS.

Most tax professionals, conservatively, advised to follow section 280A of the Code which states that a property is considered a “residence,” and therefore not an investment, if the taxpayer uses the unit for personal purposes for a number of days that exceeds the greater of 14 days or 10 percent of the number of days during the year for which the unit is rented at fair rental.  However, given there was no direct guidance from the IRS, even such limited personal use still did not guarantee the IRS allowing the exchange. (Even if a qualified intermediary is used to facilitate a 1031 exchange, there is never any guarantee that the IRS would ultimately allow the exchange after review.  If the IRS disallows an exchange, the owner will be due the capital gains tax).

Conveniently, the IRS recently issued Revenue Procedure 2008-16 which provides for a “safe harbor” with respect to vacation home owners and 1031 exchanges.  A safe harbor generally means that the IRS will not attack the transaction provided certain rules are followed.  To qualify for the protection of the safe harbor, the taxpayer must follow all of the rules.  New IRS Revenue Procedure 2008-16 is effective for exchanges of dwelling units occurring on or after March 10, 2008.

A summary of this new safe harbor is as follows:

Relinquished Property:

  • Taxpayer owns the relinquished property for at least 24 months before selling;
  • Taxpayer rents the relinquished property for at least 14 days for each of the two 12-month periods immediately preceding the sale;
  • Cannot rent to a related party unless it is a year rental and related party uses the property has his/her primary residence; and
  • Taxpayer cannot use the property for personal use more than 14 days or 10% the number of days the property was rented, whichever is greater; and
  • Taxpayer can still stay at the property to make improvements/business use reason without it being considered personal use;

Replacement Property:

  • Taxpayer must rent the replacement property for at least 14 days for the two 12-month periods immediately following the acquisition;
  • Cannot rent to a related party unless it is a year rental and related party uses the property as his/her personal residence
  • Taxpayer cannot use the property for personal use more than 14 days or 10% the number of days the property was rented, whichever is greater; and
  • Taxpayer can still stay at the property to make improvements/business use reason without it being considered personal use;
  • If taxpayer is unable to satisfy the requirements on the replacement property, he/she must amend his/her return and report the sale of the relinquished property as a taxable sale and not a 1031 exchange

In review, those who own vacation homes can now, confidently, plan so that they can defer capital gains when they want to exchange for a more desirable property using the IRS safe harbor outlined above.  In other words, a property owner should own it 2 years before an exchange, rent it to someone other than direct family at fair value for at least 14 days in each of the 2 years, and limit personal use to 14 days or 10% of the days rented, whichever is larger.  They should also be prepared to treat the new property in the same manner. Keep in mind that the property owner must also comply with the general rules of section 1031 as well.  If you or you clients should have any questions feel free to have them contact me or their tax professional.

Posted on 29 April '10 by , under Articles. No Comments.

How to Hold Title To Real Estate

How to Hold Title To Real Estate

by Gary E. Sabo, esq.

  • There are several ways in which one can hold title in real estate:
    • Sole Owner –usually used by single persons or married persons who desire to hold title individually (however in some circumstances the other spouse may be required to “quit claim” their interest as well)
      • Example:  a husband who buys and sells rehab properties takes title solely, as the wife is not involved in this business venture
      • Pros:  only one party required to transfer property etc.
      • Cons:  lack of tax advantages (such as IRC 121), probate costs
    • Tenants in Common –a tenancy in common or “T&C” is used where two or more owners take title who are not married.  Upon death of one tenant, the deceased tenant’s share passes by will or intestacy.  T&C’s can mortgage/convey their interest without the consent of the other co-tenants.
      • Example:  a mother deeds a property to her 3 children as tenants in common
      • Pros:  each tenant can own a specific unequal share:  such as tenant #1 15%, tenant #2 35% and tenant #3 50%, also can be a pro if the tenants desire for their share to pass to their heirs/divisees
      • Cons:  subject to probate, one co-tenant can force a sale w/o consent of the other tenants (known as a “partition”)
    • Joint Tenancy with Rights of Survivorship –a joint tenancy “JT” is used most often where two or more owners desire their shares to remain with their cotenants because, as with a Tenancy by the Entirety, title automatically passes to the surviving tenants upon the death of one tenant.  A deceased joint tenant’s will has no effect on title.  One joint tenant can convey his/her share without the consent of the other joint tenants, which would result in the new tenant taking title as a tenant in common with the remaining joint tenants. (unlike T&E)
      • Example:  two brothers take title to a property as joint tenants, upon the death of one brother title will automatically pass to the surviving brother by operation of law (without the need for probate)
      • Pros:  avoids probate
      • Cons:  joint tenants cannot own unequal shares like tenants in common can (i.e. two owners must each own 50%, 4 owners must each own 25%)
    • Tenants by the Entirety – aka “T&E” arises automatically where vesting is left silent between two grantees who are married.  Technically the marriage is treated as 1 legal entity.  Automatically converts to T&C upon divorce)
      • Example:  a husband and wife purchase a home, they hold title as tenants by the entirety, even if there is no specific language in the deed
      • Pros:  property cannot be reached by one spouse’s creditor, not subject to probate (automatic transfer of title upon death of one spouse), one spouse cannot convey his/her share without the other spouses signature
      • Cons:  ?
    • Intervivos Trust –intervivos means during life.  A revocable intervivos trust is a legal creation, and often grantees deed their interest into the trust so that the trust is said to own the property.
      • Example:  Husband and wife purchase a second home and take title in the name of their revocable intervivos trust.
      • Pros: avoids probate, remain in control of the property to sell or mortgage, privacy (unlike a will)
      • Cons:  legal fees to create, possible transfer taxes upon deeding in and out, more difficult to get loan in name of a trust as opposed to individually
    • LLC  -a limited liability company is a relatively recent statutorily designed entity created to combine the “veil” of liability of a corporation with the pass through taxation of a partnership.
      • Example:  two brothers intend to purchase a home and rent it, the create an LLC and take title in the name of the LLC
      • Pros:  especially useful where property involves liability exposure, such as using the property for business or renting.  A suit against the property owner can generally only be against the assets of the LLC (as opposed to the LLC’s members individually).  Also avoids probate (given that the LLC is the owner of the property, and not it’s members).
      • Cons:  transfer taxes generally on deeding in and out of the LLC, makes mortgaging/selling of the property difficult as multiple member’s signatures may be required depending on the design of the LLC

*DISCLAIMER: the above information is provided as a summary only and should not be relied upon as individual legal or tax advice.  Every individual’s particular situation is different and individual legal counsel, tailored to the individual’s particular circumstances is strongly advised.

Posted on 26 April '10 by , under Articles. No Comments.