The Closing Process in a real estate transaction

In the State of Florida, foreign investments in real estate have become one of the most significant factors for the development of the local economy.

The process of purchase and sale of a real estate, even though not very complex, may sometimes lead to misunderstandings between the parties involved in the transaction (i.e., seller, buyer, the attorneys, the real estate agents and the lender, (in case of financing) which may cause delays during the closing process, (the “Closing”).

In the United States only one subject (properly called the “Closing Agent”) is responsible for the Closing. The Closing Agent is an impartial third party that follows the real estate transaction from the beginning through the end and is agreed upon by the parties, or apportioned according to the terms of the purchase and sale agreement.

The purpose of this article is to provide the reader with a general understading of the basic steps of a Closing and the different situations which may arise in each of them.

The basic steps for a Closing are the following:

  1. Execution of the Purchase and Sale Agreement (the “Agreement”);
  2. Request for a title search (“Title Commitment”);
  3. Analysis of the legal status of the property;
  4. Compilation and compliance with all the requirements described in the Title Commitment;
  5. Drafting of the closing statements;
  6. Preparation of the “U.S Department of Housing and Urban Development Statement” (also known as “HUD”);
  7. Close the Transaction, delivery of the property and transfer of the money.

As a general rule, real estate agents are responsible for the first stage of the transaction. They generally help to find a suitable property, negotiate the sales price and draft the preliminary offer that will merge into the final Agreement. (Step 1). Since real estate agents usually follow standard and generic forms, before entering into the Agreement it is always advisable to seek counsel from an attorney.

It is important to keep in mind that the Agreement underlines all the terms and conditions of the real estate transaction, such as buyer and seller (the “Parties”); the description of the property; the sales price; the apportionment of the payments between seller and buyer, the real estate commisions (which are customarily borne by the seller), the amount of the “good faith deposit” or “guarantee deposit” (the “Deposit”), the closing date and the method of payment (by cash or by financing).

The Deposit is paid by the buyer to the Escrow Agent, which is a person or entity that holds the funds in trust for the Parties while the closing is finalized. The Escrow Agent can be the real estate agent or the attorney for buyer or seller ( notice that the Deposit is never paid directly to the seller). Once the Deposit is paid and cleared, the Escrow Agent delivers to the parties written confirmation of the amount held in escrow.

Once the Agreement is executed by the Parties, the Closing Agent has to request the “Title Commitment” (“Commitment”) from a Title Company (the future title insurer) (Step 2). The Commitment is the document by which a title insurer discloses all the liens, defects, burdens and obligations that affect title to the subject property.

The Closing Agent analyzes the legal status of the property (Step 3) and must satisfy all the requirements described in the Commitment before the Closing, such as outstanding payments due, mortgages, open liens or debts in order to obtain the title policy. At this point, the Closing date may be more precisely determined. (Step 4).

Furthermore, the Title Commitment has to be forwarded to the seller’s attorney for his review. If necessary, the Parties may modify the Closing date and agree with a future date to comply with the requirements. At the same time, Seller’s attorney shall provide to the Closing Agent with the required documentation to convey the property. (Step 5).

Usually, these are the fundamental documents to be provided by the seller:

  • The Warranty deed;
  • The Title affidavit;
  • The Closing Seller’s affidavit;
  • The Bill of sale.

However, additional documentation may be required. For instance, the Foreign Investment Real Property Tax Act of 1980 requires that any foreign seller, not resident in the U.S. shall present a FIRPTA Certificate before closing generally prepared by the Seller’s accountant, or have 15% of the amount realized withheld by the escrow agent (with some exceptions) and sent to the Internal Revenue Service (“IRS”). (This topic will be covered in a separate article)

Subsequently, the Closing Agent shall draft the “U.S Department of Housing and Urban Development Statement” (known as “Settlement Statement” or just “HUD”) (Step 6). This document lists all charges and credits to the buyer and to the seller to be paid at the Closing, such as, the agreed sales price, the title insurance costs, the Closing Agent’s and other professionals’ fees. The HUD may be modified until the Closing date and it must be approved by the Parties.

Some of the closing costs that are customarily allocated to the seller for residential closings are: the documentary stamp tax, which in Florida is levied at the rate of $.70 per $100 (or portion thereof) for the transfer interest in real property, the real estate agents commission (that usually amounts to the 6% of the purchase price), and attorney’s fees.

On the other hand, buyer is generally allocated all costs for the service provided by the Title Company (including both, the Owner’s Insurance Policy, and the Lender’s Insurance policy, which is mandatory if the purchase is subject to a mortgage) and buyer’s attorneys fees. However, an Owner’s title insurance policy is almost mandatory since it will protect the buyer against defects not detectable before the purchase, such as erroneous declarations on the seller’s marital status and thus, a possible claim by the legal spouse.

The cost of the Owners title Insurance Policy is based on the purchase price as follows: up to $100,000 is equal to $5.75 per thousand; over $100,000 it is equivalent to $5.00 per thousand.

Once the HUD is approved by the Parties, the Closing Agent has complied with all the requirements from the Commitment and the documentation required for the conveyance of the property has been approved, the transaction can be closed.

On the closing date, the Closing Agent shall have in its escrow account the total amount of funds required to close the transaction and all the documentation executed by the Parties. The Closing Agent will then proceed with the disbursements as per the HUD and the registration of the deed in the public records. (Step 7).

Remember that all the above steps may be subject to last-minutes changes and this may be a concern to the Parties. Thus, it is always advisable to seek the advice of a professional in order to obtain a proper support from beginning to end of a real estate transaction.




THE REAL ESTATE PURCHASE AND SALE AGREEMENT IN FLORIDA

This article was written with effort and dedication in order to provide valuable information on diverse topics. Please feel free to share this information with your colleagues and friends so long as you do not modify or alter its contents and our contact information.

When looking for a real estate investment in Florida, and in the United States in general, it is always advisable to contact an attorney and a real estate agent (the “Professionals”) before entering in any kind of transaction. The Professionals will draft a written offer following the standard form generally used for residential (or  commercial, as the case may be) real estate transaction, that shall be submitted to the seller. This offer will already contain all terms and conditions of the transaction and, if the offer is accepted by the seller, it will become the final Purchase and Sale Agreement (the “Agreement”). Any missing non essential information may be integrated in the Agreement at a later date.

The Agreement is the singular most important document of a real estate purchase  and sale transaction because it underlines the seller’s intention to transfer the property in exchange for the agreed upon price and the buyer’s intention to receive  the property in exchange for the payment of the price. Hence, it is the document that binds buyer and seller to comply with the terms of the transaction.

Before entering into the Agreement, the parties should have negotiated how to apportion the costs of closing i.e., whether certain payments should be allocated to seller or to buyer (some sellers may be willing to shoulder some of the costs in exchange for a quick sale).

Usually, the costs of a real estate acquisition (“Closing Costs”) in Florida include costs  of the lender (if the buyer needs financing), attorney’s fees, title insurance costs (or  Title Company’s closing costs), costs for registration of the deed (and the mortage, if any); generally, buyer will pay for the former and seller for the latter (excluding the mortgage registration).

The Agreement must also include the amount of the “good faith deposit”, also  known as “guarantee deposit”. The buyer has to pay this amount in order to prove his real intention to buy the property (and to prevent the same buyer from submitting offers for several properties with the intention  of buying just one of them). Usually, the amount of this deposit consists of a percentage of the purchase’s price, unless the purchase is from a developer, in which case the deposit is structured in several parts according to the timing of construction (e. g., 20% upon signing of the Agreement, 20% upon pouring of foundation, 20% upon reaching the floor in which the unit bought is situated, 20% upon finishing the roof, and 20% at closing). Since there are no specific rules regarding this matter, the specific amount of the deposit will follow customs and traditions of the local market.

If the transaction does not close for no fault of buyer, the deposit will be returned to the buyer. However, if buyer defaults on the terms of the Agreements the deposit will be forfeited. If the Agreement goes to closing the deposit will be credited towards the purchase price.

Usually, the deposit is paid to the Escrow Agent which may be an Attorney, a Title Company or a Real Estate Broker (never in the hands of the seller).  It is always advisable to pay the  deposit to the attorney for buyer to guarantee a quicker refund.

All the sale conditions specified in the Agreement have to be strictly observed by the  parties. For instance, a condition could contemplate that, if the purchase is subject to  financing, the buyer is not obligated to buy the property if the specified financing is not obtained.

The inspection of the property is also a relevant aspect of the inicial purchase, specially when the property is a free standing structure which may have serious  problems not readily detectable. A licenced inspector will check scrupulously the property to ensure to the buyer that there are no problems that could affect the value of the property. Of course, an unsatisfactory property inspection may be cause for withdrawal under the Agreement.

The attorney will do a title search to insure the authority of the seller to convey the property and to verify whether there are mortages, open liens or debts pending on the property.  All the foregoing will have to be satisfied before the closing.

As mentioned in the beginning, the proper drafting of the Agreement is very important in a real estate sale transaction because it reflects in advance the rights and obligations of the parties. Therefore, remember to seek the advice of an expert that can guide, advise and support you before and during the transaction.




Limited Liability Company: a business type with several advantages.

June 2015

While our previous article “Most Common Types of entities in the United States” analyzed the various forms of business entities which can be established in the USA,

this article will specifically focus on the Limited Liability Company.

The Limited Liability Company, also known as LLC, is the most popular way to start a business because of the advantages it offers.

It is a relatively new form of entity originally created in 1977 in the State of Wyoming and now recognized in all 50 States and the District of Columbia; and it can be best described as a hybrid between a corporation and a partnership since the LLC provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.

Owners of an LCC are called members and may include individuals, corporations and other LLCs (whether domestic or not). Each owner is entitled to a Membership Interest, which represents a member’s collective rights in the LLC, including the member’s share of profits and losses of the LLC,  the  right  to  receive  distributions  of  the  company’s assets and any right to vote or participate in management. Members may personally manage the LLC as well as it may be managed by selected managers. Indeed, there are two different management structures of a LCC:

1)        Member management: assume that members participate equally in the management of the company’s business; each member has an equal say in the decision making process of the company which operates much like a partnership. This is more frequent to find in small LCCs.

2)        Manager management: in which one or more owners (or even an outsider) is designated to take responsibility for managing the LCC. Only the named managers are in charge of the affairs of the company, get to vote on management decisions and act as agents of the LLC, while the non- managing owners simply share in LLC profits and losses and have the right to vote.

There is no maximum number of members, so unlimited number of individuals, corporations and partnerships may participate in a LLC.

Most states also permit “single member” LCCs.

In order to create a LCC, it is necessary to file “Articles of Organization” (in some states called “Certificate of Organization” or “Certificate of Formation”) with the LCC Division of the State government. These are considered public documents meaning   that   they   are   generally accessible by the public. The minimum information required for the articles of organization varies from state to state. Generally, it includes the name of the LLC, the name of the person organizing the LLC, the duration of the LLC and the name of the LLC’s registered agent. Some states require additional information, such as the LLC’s business purpose and details about the LLC’s membership and management structure. In all states an LLC’s name must include words or phrases that identify it as a limited liability company. These may be the specific words Limited Liability Company or one of various abbreviations of those words, such as LLC or Ltd. Liability Co.

The LLCs usually come into existence on the same day the Articles of Organization are filed and a filing fee is paid to the Secretary of State. In addition to the Articles of Organization, the LLC must have an Operating Agreement, which governs the LLC’s finances and organization and sets the rules and regulations for operating the company (i.e., the LLC member’s rights and responsibilities, their percentage interests in the business, their share of the profits and other provisions) and lists the members of the company. The Operating Agreement may be easily modified with the required percentage of votes, as the business grows and changes.

As  mentioned  above,  the  LLC  is  a  hybrid  between  the corporation form of organization and the partnership form. Just like shareholders of a corporation, all LCC members are protected from personal liability for business debts and claims: only LCC assets may be used to pay off business debts, while owners stand to lose only the money invested in the company. However, a LCC doesn’t have the corporate formalities (board meetings, shareholders meeting, minutes, etc.)   or   extra   levels   of   management   (Shareholders, Directors,   Officers),   but   the   easy   management   of   a partnership, with just one level of management.

Another difference from corporations (in particular, “C” corporations) is related to the tax treatment of a LLC. Indeed, in the eyes of the federal government LCCs are considered as pass through entities, meaning that business income and expenses are “passed through” the business to the members, who report their share of profit – or losses – on their personal tax returns, just like the owners of a partnership would (so called, “federal pass-through tax advantage”), which is exactly the same tax advantage of partnerships. Thus, the business itself is not taxed, but business’ taxes are paid through the owners’ personal income tax return. However, if the LLC has only one member, it is treated as a disregarded entity for income tax purposes. Both LLC with two or more members and with only one member may elect to be treated as a corporation.

When the LLC has a single member, it may be useful to know about the Foreign Investment in Real Property Tax Act of 1980 income tax withholding, also known as FIRPTA. FIRPTA is a United States tax law that imposes U.S. income tax on foreign people selling U.S. real estate or, more in general, disposing of United States real property interests. People from all over the world invest in United States real estate, so if you are buying property from a foreign owner, FIRPTA may apply to your purchase. Under this law, people purchasing U.S. real property interests (transferee) from foreign persons (transferor) are required to deduct and withhold a tax equal to 10% of the total amount realized by the transferor on the disposition (which is normally the purchase price). It is important to know about FIRPTA because if the transferor is a foreign person and you fail to withhold, you may be held liable for the tax and penalties do apply.

The 2013 Florida Legislature adopted a new limited liability Company act, which is called the Florida Revised Limited Liability Company Act (the “Act”) and created new Chapter 605 of the Florida Statutes.

The new law became effective January 1, 2014, even though LLCs already in existence before that date were given the possibility to continue to operate under the provisions of the existing law (unless they elected to be governed by the new act) until December 31, 2014. This means that actually January 1, 2015 is the date from which all LCCs formed or registered in Florida are subjected to the new law.

Just like the previous law, the new one remained a “default statute”, which means that, except for the “nonwaivable” provisions expressly listed in the new Chapter 605, the members may override the statutory default rules by their operating agreement.

Among some of the more important changes in the new law are the following:

a)        Adds more “nonwaivable” rules pertaining to operating agreements, meaning that certain rules cannot be overridden by the operating agreement, while others can be modified with certain limitations;

b)        Delineates the liability of members and managers with  respect  inaccurate  records  filed  with  the

Department of State;

c)        Clarifies that there are only two management structures  for  LLCs  (“manager-managed”  and

“member-managed”) and defines very precisely the respective duties of members and managers in each case. Moreover, it eliminates the term “managing member”;

d)        Permits LLCs to file Statements of Authority with the Department of State to delineate the authority

of certain persons or groups of persons (as members, managers and/or officers) associated with the LLC;

e)        Permits interest exchanges and explicitly addresses direct actions by members against the LLCs, as well as actions against other members and managers, to enforce member’s rights and protect their interests.

Also,  for  the  first  time,  companies  based  outside  of  the United States that want to domesticate as Florida LLCs will be allowed to do so while keeping their status of foreign entity.

The new law has represented a substantial evolution in Florida law and was intended to modernize Florida’s LLC law, so to make Florida a more attractive place to organize and operate an LLC.

 

Cav. Piero Salussolia , Esq.

Dott.ssa  Angela  Cappuzzello (not admitted in Florida)

This article was written with effort and dedication in order to provide valuable information on diverse topics. Please feel free to share this information with your colleagues and friend so long as you do not modify or alter its contents and our contact information.

IUS GENTIUM By: Piero Salussolia P.A.



OFFSHORE VOLUNTARY DISCLOSURE PROGRAM

January 2015

Offshore structures have become one of the preferred business vehicle for investments in the United States due to its discretion and tax advantages although, if erroneously applied, could subject its owner(s) to heavy sanctions and criminal liabilities.

In order to prevent tax evasion and money laundering, the Internal Revenue Service (“IRS”) introduced the Offshore Voluntary Disclosure Program (“OVDP”), which has been revised over the years.  In June 2014, the IRS announced the latest version of the OVDP. The program was initially created after the U.S. Department of Justice (“DOJ”) discovered international tax evasion by U.S. taxpayers using hidden offshore bank accounts.

 A renowned case of tax fraud in the U.S. is the Birkenfeld case, in which the DOJ investigated Swiss bank UBS after Bradley Birkenfeld, a former employee, had divulged details of how the bank facilitated U.S. taxpayers to conceal income and assets not reporting them to U.S. authorities.  The DOJ entered into a deferred prosecution agreement with UBS imposing a $780 million fine to be paid by the bank, which also agreed to disclose account information for more than 4,500 clients. 

Similarly, Credit Suisse had to pay $2.6 billion dollar fine for conspiring to aid tax evasion.  To date, there are about 100 Swiss banks negotiating their cases with the DOJ to prevent facing felony tax charges.  Equally, Deutsche Bank AG was accused of aiding tax evasion and agreed to pay $554 million to avoid prosecution.

Presently, U.S. taxpayers holding foreign financial accounts must report their interest when the aggregate value of those accountsexceeds $10,000 U.S. dollars at any time during the calendar year, by filing a Report of Foreign Bank and Financial Accounts (“FBAR”); otherwise, they may be subject to civil and/or criminal sanctions.

The OVDP was introduced in 2009 for taxpayers who intentionally failed to report offshore income and failed to file the FBAR. Accordingly, taxpayers who amended their tax returns and filed FBARs for the years 2003 to 2008, had an opportunity to avoid criminal prosecution and were to pay the equivalent of 20% of the highest aggregate value of the unreported offshore accounts during the six-year period as penalty. Later in 2011, the offshore penalty increased from 20% to 25% and the disclosure period was extended from six to eight years (2003 to 2010).  In 2012, the penalty increased to 27.5%.

The 2011 reform also included the opt-out procedure where taxpayers could avoid criminal prosecution although remaining subject to all penalties as mitigated by the program; so the taxpayer would opt out the ODVP, so long as the IRS proved the voluntary non-compliance.

The latest changes to the OVDP were announced in June 18, 2014. The new rules are stricter due to the awareness and efforts in preventing tax evasion. Many offshore financial institutions have been requiring U.S. taxpayers to assure they are reporting the offshore income to U.S. authorities.

Due to the publicity surrounding the voluntary disclosure initiatives, U.S. taxpayers with offshore financial accounts should know of their duty to report the income; accordingly, undeclared offshore income would be treated as a willful non-compliance with U.S. tax law. For delinquent FBARs, a 50% penalty will be applied when a financial institution (where the taxpayer has or had an account) has been publicly identified as being under investigation or as cooperating with an investigation.

In 2012, the IRS also created streamlined offshore procedures for U.S. taxpayers living abroad or dual citizens with delinquent tax returns. They were required to file the returns for the previous three years and to file FBARs for a six year-period, along with the penalty fee. Low compliance risk taxpayers (i.e., less that $1,500 in tax due each year) were not subject to penalties or follow-up actions.  Nonetheless, the risk level could increased based on the following factors:

  1. There were indications of tax planning or avoidance;
  2. There was material economic activity in the U.S.;
  3. Any of the tax returns claimed a refund;
  4. The taxpayer did not report the income in the country of residence;
  5. The taxpayer was under investigation by the IRS;
  6. FBAR penalties had been previously imposed;
  7. The taxpayer had a financial interest over any financial account located outside his or her country of residence;
  8. There was U.S. source income.

In the 2014 reform, this procedure was maintained and modified. Now procedures are available to both U.S. individual taxpayers residing in and outside the U.S. who certify that the failure resulted from non-willful conduct.  Accordingly, taxpayers may follow Streamlined Foreign Offshore Procedures (“SFOP”), or Streamlined Domestic Offshore Procedures (“SDOP”).  Eligibility for one or other procedure depends on whether the taxpayer, for the three most recent years for which the tax return is due, did not have a U.S. abode and was physically abroad for at least 330 full days, or is not a U.S. citizen or legal permanent resident. In such case, the SFOP apply.

To comply with the SFOP, the taxpayer must submit a delinquent tax return or amend the one previously filed, for each of the most recent 3 years for which the U.S. tax return is due.  Additionally, the taxpayer must submit delinquent FBARs for each of the most recent 6 years for which the FBAR due date has passed, along with payment of all tax due and all applicable statutory interest with respect to each of the late payment amounts.  Taxpayer will be exempt from late fees.

Additionally, the taxpayer will have to certify the submission of all the FBARs and that failure to file tax returns, report income, pay tax, and file information returns, resulted from non-willful conduct.

To comply with the SDOP the requirements are similar but the offshore penalty is equal to 5% of the highest aggregate balance of the foreign financial assets for each of the years in the covered tax return period.

As explained, it is mandatory to know and understand the foregoing rules since the authorities are putting a big effort to collect from delinquent taxpayers and the ignorance of the law is no longer an excuse.

 

Cav. Piero Salussolia,Esq.;

Lizet Cardozo, Abg. (admitted in Colombia only);

Monica Tirado, Abg. (admitted in Colombia only).

This article was written with effort and dedication in order to provide valuable information on diverse topics. Please feel free to share this information with your colleagues and friend so long as you do not modify or alter its contents and our contact information.

 




Investments in the United States – Part II

December 2014 

Real Estate (“R.E.”) investments in the United States (“U.S.”) and their tax implications are subject to various factors that determine the investment’s viability and efficiency according to the investor’s necessity.   

This article will focus on Personal Investment in relation to state and local capital gain tax, ordinary income tax, and federal estate tax.

As it was explained in Investments in the United States, Part I, all ordinary income and capital gain may be subject to state and local tax, which rate varies from state to state.  There are some states that do not asses a tax on personal income, such as Florida. Nonetheless, Florida has a 5.5% corporate income tax (as will be discussed in the forthcoming articles).

Besides Florida, Alaska, Nevada, South Dakota, Texas, Washington and Wyoming do not have a personal income tax.  While New Hampshire and Tennessee impose a tax only on interest and dividend  income, all other states have some sort of personal income tax.  The state with the highest tax rate is California at 13.3%, and one with the lowest rate is North Dakota at 3.22%.  In addition, some states, like New York, allow cities and/or counties to impose taxes.  Accordingly, New York City levies a local income tax of 3.88%, which combined with New York State tax of 8.82%, reaches a total of 12.7%.

 (See below a list of some cities that levy a separate individual income tax).

Chart 1 

CITY

LOCAL TAX

STATE TAX

STATE AND LOCAL TAX  

Indianapolis, IN

1,62% 3.4% 5.02%
Baltimore, MD 3.2% 5.5% 8.7%
Montgomery, MO 3.2% 5.5% 8.7%

Detroit, MI

2.5% 4.35% 6.85%

New York City, NY

3.88% 8.82% 12.7% 

It is worth noting that gifts of intangible personal property, e.g., U.S. stocks and bonds, are exempt from U.S. gift tax for NRAs, as opposed to estate taxation –as previously described.Foreign nationals not U.S. residents or Non-Resident Aliens (“NRAs”) not domiciled in the U.S. are also subject to federal estate taxation with respect to certain U.S.-situated assets. These assets include: (1) R.E. in the U.S. at the date of death; (2) tangible personal property (e.g., motor vehicles, artwork, watercrafts, animals, precious gems and metals) physically located in the U.S. at the date of death; and (3) intangible personal property such as securities of U.S. companies, personal and U.S. corporate debt securities (except for securities that generate portfolio interest which is an interest on an obligation issued by a U.S. person where the beneficial is a foreign person who is not a 10% shareholder in the issuer at the time the interest is received), patents, trademarks, and copyrights.  

As of 2014, the highest tax rate on Estate Tax is 40% (see the chart below with the applicable rates). 

Chart 2 

TAXABLE ESTATE

TENTATIVE TAX EQUALS

PLUS                         OF AMOUNT OVER
0 – $10,000 $0  18% $0 
$10,000 – $20,000  $1,800  20% $10,000 
$20,000 – $40,000  3,800  22% $20,000 
$40,000 – $60,000 $8,200 24% $40,000 
$60,000 – $80,000  $13,000  26% $60,000 
$80,000 – 100.000  $18,200  28% 

$80,000 

$100,00 – $150,000 $23,800 30%

$100,000

$150,000 – $250,000 $38,800 32% $150,000
$250,000 – $500,000 $70,800 34% $250,000
$500,000 – $750,000 $155,800 37% $500,000
$750,000 – $1,000,000 $248,300 39% $750,000
$1,000,000 $345,800 40% $1,000,000

A NRA estate is allowed to claim a credit of $13,000, which excludes the first $60,000 of property from U.S. taxation, as opposed to the estate tax exemption of $5,340,000 (in 2014) available for U.S. citizens and resident aliens. 

The U.S. has entered into several estate tax treaties which allows NRAs to avoid double taxation. In the event that a NRA (being a citizen of, or domiciled in, the treaty country) dies owning taxable U.S. situated assets, the NRA estate may claim available credits and deductions.   

As described, personal investments in the U.S. are subject to different tax rules.  Accordingly, it is mandatory to examine the investor’s goals and objectives because there are scenarios where a personal investment can result more advantageous than an investment through a company.  As an illustration, the maximum capital gain tax rate for individuals is 20% as opposed to an almost 40% federal and state combined rate for Florida corporations, as it will be discussed in the forthcoming articles.

Cav. Piero Salussolia,Esq.;

Lizet Cardozo, Abg. (admitted in Colombia only);

Monica Tirado, Abg. (admitted in Colombia only). 

This article was written with effort and dedication in order to provide valuable information on diverse topics. Please feel free to share this information with your colleagues and friend so long as you do not modify or alter its contents and our contact information.




Investments in the United States – Part I

November 2014 

Foreign investment in the United States (“U.S.”) is generally considered advantageous due to the stability of its economic system and a tax structure that, although complex, facilitates foreign investment.  The U.S. has a legal system where every state within its territory coexists with the federal system of government. Accordingly, when investing in the U.S., there are key factors (e.g., geographic location; type of investment; local, state, and federal tax issues; corporate and estate taxes) that must be taken into consideration, which will be discussed in this and forthcoming articles.

 This is the first of four articles that will provide a general overview of different investment structures, specifically on real estate (“R.E.”) investments in the U.S. and their tax implications.  It will analyze such investment structures in the following four scenarios:

1. Personal Investment (Federal taxation);

2. Personal Investment (State and Estate taxation);

3. Investment through a domestic company;

4. Investment through a foreign entity and “Tandem Structures.”            

Generally, and not considering R.E. Property Taxes and local taxation where applicable, there are four basic types of taxes imposed on the holding and disposition of a R.E. investment in the U.S.:

  1. Income Tax;
  2. Withholding T ax on Fixed, Determinable, Annual, or Periodic income;
  3. Capital Gain Tax;
  4. Estate Tax.

Application of Income Tax depends on whether a non-U.S. citizen will be considered a tax resident alien or non-resident alien. A non-citizen is considered a U.S. resident alien, for tax purposes, if lawfully admitted as a legal permanent resident (green card holder), or if the non-citizen meets the substantial presence test as required by the Internal Revenue Code of 1986 (“I.R.C.”), and its amendments.

The substantial presence test requires an individual to be present in the U.S. for at least 31 days during a calendar year, and 183  cumulative days during a 3-year period (including the current year and the two preceding years). The 183-day requirement is determined according to the following formula: an individual is treated as present in the U.S. if physically present in the country all days in the current year; 1/3 of the days present in the preceding year; and 1/6 of the days present in the second preceding year.  The following example illustrates the application of the Substantial Presence Test:

Chart 1

 

PRESENCE

DAYS

FORMULA

RESIDENCY

DAYS

Current year

120

100%

120

1st

Prev. year

150

33.33%

50

2nd

Prev. year

120

16.66%

20

Total

 

 

190

In the example described in Chart 1, the non-U.S. citizen will be considered a tax resident alien because the individual cumulated more than 183 days all together in the 3-year period. 

Resident aliens are generally subject to income taxation on their worldwide income in the same way as U.S. citizens.  Nonetheless, resident aliens may claim a foreign tax credit in order to avoid double taxation.  

In turn, non-resident aliens’ income, subject to U.S. income tax, is divided into two categories depending on whether or not the income is effectively connected with a trade or business in the U.S.  In the first category, if engaged or considered to be engaged in a trade or business in the U.S. during a fiscal year, the non-resident alien (“NRA”) will be treated as a taxpayer subject to the same rates that apply to U.S. citizens and residents.

The chart below illustrates the tax rates applicable to joint tax returns for married couples. 

       Chart 2

NET INCOME

RATE

$17,850 or less

10%

$17,851 – $72,500

15%

$72,501 – $146,400

25%

$146,401 – $223,050

28%

$223,051 – $398,350

33%

$398,351 – $450,000

35%

$450,001 and above

39.6%

In this case, the net income (gross income minus allowable deductions) is determined and a Form 1040NR, U.S. Nonresident Alien Income Tax Return, is required to be filed.  NRAs must apply and obtain an Individual Taxpayer Identification Number (“ITIN”) with the Internal Revenue Service (“IRS”).  The application must include a copy of the NRA’s passport certified by the issuing agency.

In the second category, NRAs’ income that is not effectively connected with a trade or business in the U.S., will be subject to a flat tax of 30%  or a lower treaty rate (if applicable) of the gross amount of U.S. source fixed or determinable, annual or periodical income (“FDAPI”).  Deductions are not allowed and the NRA does not have to file a tax return.

It may be worth nothing that this 30% tax rule may apply to real property rental income when a NRA taxpayer chooses not to treat that income as effectively connected with a trade or business.  In such case, the tenant is responsible to withhold the tax from the rental income and remit it to the IRS.  If the NRA chooses to treat the real property rental income as effectively connected to a trade or business in the U.S. during the fiscal year then, the IRC allows deductions to be claimed against the gross income (e.g., condominium expenses, property tax, utilities, repair costs, furniture depreciation, amortization of property) and the NRA would be  taxed at the graduated rates that apply to U.S. citizens and resident aliens. 

A NRA is subject to long-term capital gains tax rates in the same way as a U.S. citizen, as the chart below illustrates (this rate is lower than that of Chart 2).

Chart 3

CAPITAL GAIN INCOME

RATE

$72,500 or less

0%

$72,501 – $450,000

15%

$450,001 and above

20% 

Capital gain profit generated from the sale of real estate (or any other assets held for investment purposes) is calculated on the difference between the purchase price, purchase expenses, selling price, selling expenses, and improvement and remodeling costs.  

Be aware that any capital gain or rent may also be subject to state tax. This issue will be discussed in Part II of these series of articles.

 

Cav. Piero Salussolia,Esq.;

Lizet Cardozo, Abg. (admitted in Colombia only);

Monica Tirado, Abg. (admitted in Colombia only). 

This article was written with effort and dedication in order to provide valuable information on diverse topics. Please feel free to share this information with your colleagues and friend so long as you do not modify or alter its contents and our contact information.




PORTFOLIO INTEREST

November 2011

1. Introduction.

When a foreign person sells U.S. real estate to an unrelated buyer on the installment basis, normally the interest on the future installments will be subject to 30% U.S.

Withholding tax if the foreign seller is not a treaty resident entitled to a U.S. treaty reduction. However, the “portfolio debt” rules provide the foreign seller with an exemption from U.S. withholding tax if the installment note is structured to qualify as a “portfolio debt.” At a minimum, the foreign seller cannot be a commercial bank or a 10% or greater equity owner of the issuer of the installment note ( i . e, the, buyer). Assuming these statutory requirements are met, there is a further issue as to whether the interest would be “effectively connected” to any FIRPTA gain which is recognized under the installment method in the future. This is an unresolved issue. As a result, the more prudent course would be to not elect the installment method for reporting gain from the USRPI sale, so that all of the gain would be taxable in the year of sale and there would be n o future FIRPTA gain to which the interest might be deemed “effectively connected.” Assuming the foreign seller is prepared to forego the opportunity to defer the FIRPTA gain recognition and opt, instead, for the portfolio bond exemption, then the installment note must meet the requirements of the “portfolio debt” rules.

    1. Requirements   To   Qualify   for Portfolio Interest Exemption.
      1. Original Requirements. The Tax Reform Act of 1984 added Code § 871(h),  which provides  an exemption from withholding tax for interest paid to foreign holders with respect to certain “portfolio debt instruments” issued after July 18, 1984. Different requirements apply to “registered bonds” and “bearer bonds.” This outline will o n l y discuss the requirements applicable to “registered bonds.” In the original portfolio interest regulations issued in 1984, the Treasury took the position that only interest with respect to obligations of a type described in S 163(f)(2)(A) could qualify for the portfolio interest exemption. Therefore, interest on obligations issued by natural persons, obligations with maturities o f less than one year, and obligations not of a type offered to the public could not qualify for the portfolio interest exemption. After receiving much criticism for this position, the Treasury abandoned the requirement in revisions to the portfolio interest regulations released December 16, 1986./ Thus, interest on privately placed debt obligations (i.e., of a type not offered to the public) as well as obligations issued by individuals and obligations with a maturity of less than one year may also now qualify for the portfolio interest exemption. However, as will be discussed more fully below, proposed regulations would apply certain more stringent reporting requirements to such privately placed obligations.
      2. Oualification Requirements Under the New Treasury Regulations. Payments of interest on non-bearer, privately placed debt instruments issued after July 18, 1984 are exempt from withholding tax subject to the following conditions.
          • Registration Requirement. The obligation must be registered with the issuer as to both principal and interest and the obligation may be transferred only by one or both of the following methods: (1) by surrendering the original instrument in exchange for a new instrument or (2} by transfer on a book entry system maintained by the issuer.
          • (A) Language to be Inserted in Obligation. The foregoing requirements must be reflected in the language of the debt instrument itself.
          • Proposed and Temporary regulation impose an excise tax upon unauthorized transfers. Temporary regulations issued on May 18, 1988 provide that any person who holds a registration required obligation that is in registered form and who transfers the obligation through a method not described in i. above, is considered the issuer of the obligation transferred for purpose of the excise tax imposed under Code § 4701.
      1. Identification Requirement. In order to collect interest on a registered bond free of withholding tax, a foreign payee must provide the paying agent with a statement that (1) is signed by the beneficial owner under penalties of perjury, (2) certifies that such owner is not a United States person, or in the case of an individual, that he is neither a citizen nor a resident of the United States, and (3) provides the name and address of the beneficial owner. The statement may be made, at the option of payor, on IRS Form W-8.
          • Administrative Requirements. The foregoing statement must be received by the payor in the calendar year in which the payment is made. The payor, however, may require the statement from the payee each time it makes a payment to the payee. The payor must retain the statement for at least four calendar years after the amount to which the statement relates is paid. If the person providing the statement becomes a United States citizen or resident during the period to which the statement relates such person shall notify the payor within 30 days of such change in status.
          • Information Return. Payor shall make on or before March 15 an annual information return on IRS Form 1042S of all items of interest subject to the foregoing provisions paid during the previous calendar year. IRS Form W-8 shall be attached to the information return.
      2. Less Than 10% Shareholder Requirement. Interest payments may not be made to a 10% or greater shareholder of obligor
          • Proposed Regulations Would Apply Additional Disclosure Requirements for Privately Placed Obligations. Proposed Treasury Regulations would impose additional disclosure requirements for payments under privately placed obligations. These disclosure requirements would consist of a written statement under penalty of perjury (the “Affidavit”) made by each of the foreign payee stating: (1) that the interest is not received by a 101 shareholder of payor;
          • (2) the name and address of the person making the statement; and (3) information sufficient on its face to confirm the validity of the statement. Such information must identify the ultimate individual beneficial owner(s) of the person making the statement, and identify the stock in the other party held actually and constructively by the person making the statement. The written statement must be attached to the yearly information return to be filed by payor.
Interest Payable to Foreigners, if qualify as a portfolio interest, is not subject to withholding.

 

 

 

 

 

Cav. Piero Salussolia , Esq.

Monica Tirado, Abg. (admitted in Colombia only) 

This article was written with effort and dedication in order to provide valuable information on diverse topics. Please feel free to share this information with your colleagues and friend so long as you do not modify or alter its contents and our contact information.

IUS GENTIUM By: Piero Salussolia P.A.




CONDO FEES

“WAR WITH THE BANK INDUSTRY”

October 2011

Recently, a three-judge panel of the 3rd District Court of Appeal in the State of Florida has ruled that banks are not responsible for unpaid condominium association fees until they actually take title to the foreclosed

unit and it further held that, once they do so, State law only requires that banks pay six months of past-due condominium fees or one percent (1%) of the original mortgage amount, whichever is less. Because of this stringent limitation, the amount collected by the condominium association is often far less than the money actually owed on the foreclosed unit.

In the Miami-Dade County alone, an approximate of 64,001 foreclosure cases were filed last year and more than 4,000 are filed each month. Thus, the direct consequences of this ruling, combined with the catastrophic situation in the residential real estate market which has forced many unit owners into dire economic difficulties, are costing condominium associations thousands of dollars in delinquent maintenance fees.

Of course, condominium associations’ problems get worse when faced with banks that are taking a year o more to foreclose, presumably seeking delays intentionally simply to avoid holding title to the foreclosed unit in an attempt to avoid paying condominium associations’ fees as any other unit owner would have to pay.

Condominium associations supported by state representative, Julio Robaina would like to change these laws and limit the application of the above mentioned court ruling in the up-coming legislative session. Robaina proposes to require banks to pay at least six months of past- due condominium associations’ fees at the commencement of a foreclosure proceeding and also to pay a “fair share” of the remaining fees after taking title to the foreclosed unit

On the other hand, Anthony DiMarco, lobbyist for the Florida Bankers Association in Tallahassee, commented that the push to force banks to pay condominium associations’ fees earlier that state law currently requires could back fire forcing banks to stop financing condo purchases. As we all know the lending market is already in bad shape and secondary market lenders Fannie Mae and Freddie Mac have set limits on loans they would acquire if condominium associations have high delinquencies.

As always, the spectrum of personal alternatives and preferences is multifaceted. There are condo owners who really care about their home and do everything possible to avoid foreclosure, others who could mediate with the banks and reset mortgage rates and/or monthly payments and, finally, others who are just not doing anything to fight the foreclosure; meanwhile the court system can take at least a year to get through and finally foreclose upon the property./p>

LThe solution to this ongoing dilemma is certainly not easy; different interests are fighting to gain ground in a market that is not forgiving. However we think that banks have already gotten too many breaks from our government and that condominium associations should probably be helped a little to coast along in these times of trouble.

We will keep you posted on future developments.

 

Piero Salussolia, Olga Ordenez, Monica Tirado

Cav. Piero Salussolia , Esq.

Olga Ordenez

Monica Tirado

 

Cav. Piero Salussolia, Esq.

Avv. Gemma A. Caterini (admitted only in Italy).

This article was written with effort and dedication in order to provide valuable information on diverse topics. Please feel free to share this information with your colleagues and friend so long as you do not modify or alter its contents and our contact information.

IUS GENTIUM By: Piero Salussolia P.A.



A DIFFERENT WAY OF INVESTMENT IN REAL ESTATE

December 2010
 
Purchasing tax liens instruments from county and municipal governments can provide an investor with very high and very secure rates of return as high as 18% per year. If performed correctly, investment in tax lien instruments will far outpace stock market performance. The small handful of investors, who know how to perform this process correctly, are using the power of compounding interest to double their money every couple of years.

How does this work? Well, unlike a stock market purchase, when an investor purchases a tax lien certificate he does not need to worry about sudden changes in the market. Rather, the investor becomes a lien holder with very strong legal rights. The investor will either:

  1. Earn a fixed and stated return on the amount invested in buying the certificate, or
  2. May foreclose and take title to the real estate backing the certificate.

The real challenge to investing in tax lien certificate comes when trying to avoid the various state deadlines and hidden traps which can hinder the inexperienced investor. Tax certificates usually have a maturity date of 2 years after April 1st of the year of issuance of the certificate; and, can only be enforced within 7 years from the date of issuance.

For Example: Paul J. Homeowner, who lives in Miami, Florida, doesn’t pay his property tax. Florida will send Paul a notice to pay the taxes or the state authorizes the county, in this case Miami-Dade County, to transfer the taxes owed on a property by selling a tax certificate to an investor. To get money quickly, many governments sell their liens, which they hold on real estate, to investors. The local government issues a tax lien certificate, giving private investors the senior lien on real property.

The government does virtually all the work for the investor, becoming, in effect, the investor’s bank. If the property owner pays the government the outstanding taxes due before the certificate reaches maturity, the government will send the investor the initial investment along with all outstanding interest due. On the contrary, if the property owner does not pay his/her taxes, the investor will have hit the lottery. The government will transfer to the investor the deed to the underlying property, free-and-clear. Tax Certificates are senior to all other mortgages and liens (including Federal tax liens). This means that the investor could take a property with an investment of approximately 8% of the value of the property (real estate taxes in Florida being constitutionally limited to 2% per year, thus giving a monetary exposure to the investor of 4% to 6% plus approximately 2% of administrative costs considering 2 to 3 years to acquiring the title).

The sale of tax certificates by the Tax Collector is required by state law to be conducted beginning on or before June 1 for the preceding year of delinquent real estate taxes. Delinquent taxes must be advertised for three consecutive weeks in a local newspaper. At the sale, bidding begins at an 18% interest rate and is bid down until the certificate is sold to the lowest bidder. When a tax certificate is redeemed and the interest earned on the face amount turns out to be less than 5%, a mandatory charge of 5% interest is due. Tax certificates are dated as of the first day of the year of the tax certificate sale and expire after seven years.

The certificate’s face amount consists of the sum of the following: unpaid real estate taxes, charge for delinquency (3% on the unpaid tax amount for April and May), Tax Collector’s commission (5% of the unpaid tax amount), June interest (1.5%), advertising and cost of sale- related charges.

It is important to remember the element of risk involved in the purchase of tax liens. Properties under the control of the Federal Deposit Insurance Corporation (FDIC) and Drug Enforcement Administration (DEA) may give those agencies priority over tax certificates and, thus, the investor could possibly result in the loss of an investor investment.

In addition, if the owner of a property for which a tax certificate has been issued and purchased by an investor becomes involved in a bankruptcy, it is the certificate holder’s responsibility to seek legal counsel to protect their investment. During bankruptcy proceedings the court may order the collection stayed until such time as the court enters a final order. While the bankruptcy court generally upholds the validity of the tax certificate, in many cases the court may allow partial payments over time and may reduce the interest rate payable to the certificate holder.

Además, si el propietario de un inmueble para el que un certificado de impuestos ha sido emitido y adquirido por un inversionista se ve envuelto en una bancarrota, es responsabilidad del titular del certificado de buscar asistencia legal para proteger su inversión

Individual certificates issued are transferable by endorsement at any time before they are redeemed or a tax deed is executed. A tax certificate transfer form may be obtained from the Tax Collector’s office. The assignment must be returned and recorded with the Tax Collector’s office. There is a fee of $2.25 for each transfer.

Any tax certificate can be cancelled if errors, omissions or double assessments are made. An error in assessment results in a change in the face amount of the certificate. In the event an error is discovered, the tax certificate may be cancelled or corrected by the authority of the Department of Revenue. In this case, the corrected portion or the cancellation shall earn interest at the rate of 8% per year, simple interest, or the rate of interest bid at the certificate sale, whichever is less. The interest is calculated from the date the certificate was purchased until the date the refund is ordered.

The issuance of a tax certificate on a parcel does not entitle the buyer to the property. The holder of a tax certificate may not directly, through an agent, or otherwise initiate contact with the owner of property upon which he or she holds a tax certificate to encourage or demand payment until two years have elapsed since April 1 of the year of issuance of the tax certificate. The redemption of a tax certificate can only take place at the Tax Collector’s Office.

At any time after two years have elapsed since April 1 of the year of issuance of the certificate and before the expiration of the seven years from the date of issue, the individual certificate holder may submit a tax deed application to the Tax Collector. Any certificate holder making application for a tax deed, shall pay the Tax Collector an application fee, a title search fee and all amounts required for redemption or purchase of all other outstanding tax certificates, interest, omitted taxes, and delinquent taxes relating to the real estate. A parcel assessed as homestead property on the current tax roll will have the amount equal to one-half of the current assessed value added to the opening bid. The tax deed is publicly auctioned by the Clerk of the Court and issued to the highest bidder. Pursuant to Florida Statutes 197.502 and 197.542, the tax deed applicant will be required to pay the one-half of the current assessed value added to the opening bid. The tax deed is publicly auctioned by the Clerk of the Court and issued to the highest bidder. Pursuant to Florida Statutes 197.502 and 197.542, the tax deed applicant will be required to pay the one-half assessed value on homestead property if there are no other bids in or to retain the tax deed.

 

Cav. Piero Salussolia , Esq.

Adriana Marquez

This article was written with effort and dedication in order to provide valuable information on diverse topics. Please feel free to share this information with your colleagues and friend so long as you do not modify or alter its contents and our contact information.

 

IUS GENTIUM By: Piero Salussolia P.A.




YEAR OF ZERO ESTATE TAXES

May 2010

2010 was supposed to be the perfect year to die, at least from an estate-planning standpoint: for the first time since 1915, there is no federal estate tax to pay by decedents who die during the course of the current year. If that sounds too good to be true,

it’s because it probably is. Unintended consequences could accidentally disinherit heirs, trigger capital gain tax issues, spawn countless lawsuits and turn one’s 2010 death into a nightmare for executors and estate planners.

Under a tax reform bill that Congress passed in 2001, the estate tax was slowly phased out. Each year since 2002, the amount exempted from estate taxes has increased and the tax rate has decreased to reach taxation zero for the current year. For 2009, estates valued at less than $3.5 million were exempt from the tax and the higher marginal tax rate on non-exempt estates was 45 percent. In 2010, all estates are exempt and the marginal tax rate is zero.

Here’s the problem: in 2011, the phase-out is “sunsetted” and estate taxes return to the 2001 level with a $1 million exemption and with the higher marginal tax rate set at 55 percent for amounts beyond the exemption. It could actually be above 60 percent for estates in excess of $10 million.

The downside is that in the absence of an estate tax the heirs will not receive a stepped-up basis on the property inherited. As an example, a property bought in 1930 for $20,000, and worth $2 million in 2009, assuming the owner died in said year, would have been subject to estate taxes on the $2 million value at time of death, but the heirs would have received that asset with a stepped up basis of $2 million. If the heirs then were to sell the property the next day(of course at the same 2 million as value), they will not be subject to any capital gain tax because there would have been no capital gain. This year, however, when there are no estate taxes, the heirs will not inherit the property with a stepped-up basis of $2 million but with its original basis of $20,000.

Having an estate tax that has changed each year for the past 7 years has already caused chaos on family businesses trying to plan for the future. Money that could have been spent on growing businesses, creating jobs, or providing better benefits to employees was directed instead to attorneys and accountants. It is estimated that small businesses spent $6 billion annually on lawyers, accountants and insurance premiums, just to minimize the effect of the estate tax.

 

In 2009, there were roughly 5,000 to 6,000 estates that were affected by the estate tax. That’s less than 1 percent of all estates. A married couple whose plans were done correctly could have shielded $7 million because each spouse was entitled to his or her exemption. Now that there is no step-up in basis, it is estimated that 60,000 to 70,000 estates will be affected (i.e, generate issues for the heirs in dealing with capital gains taxes). One of the big concerns is the administrative nightmare that results from losing the step-up in basis: really meticulous record-keeping of assets and transactions, spanning over two generations.

Congress, in an attempt to resolve the dilemma, may move toward new legislation before the end of 2010 or at least a retroactive tie over from the estate tax law applicable in 2009. Otherwise, the uncertainty of this situation may wipe out any planning that was already done. We are left to hope that Congress achieves some final compromise on the estate tax law shortly so that estate planning may be considered again with some degree of certainty and not as a mere guessing game.

_____________________
1 Estate Tax is the levy imposed by the Internal Revenue Service on the assets (the Estate) of a decedent domiciled in the United States.

 

Piero Salussolia, Olga Ordenez, Monica Tirado

Cav. Piero Salussolia , Esq.

Olga Ordenez

Monica Tirado

This article was written with effort and dedication in order to provide valuable information on diverse topics. Please feel free to share this information with your colleagues and friend so long as you do not modify or alter its contents and our contact information.

 

IUS GENTIUM By: Piero Salussolia P.A.