Taxes, Foreign Buyer Considerations & Buying from an Estate
TAXES
Taxes and Real Estate – The Basics n POINTS n Points are deductible if n % of amount borrowed not a flat fee n Loan on principal residence secured by property n Must be paid with funds other than lender
Taxes and Real Estate – The Basics n POINTS n REFI Points n Generally not deductible on year paid but ratably over term of loan n If property is sold, unamortized points are deductible in year of sale
Taxes and Real Estate – The Basics n CLOSING COSTS n Add to basis of property not deductible in year of purchase transaction
Taxes and Real Estate – The Basics n n RENTED HOME (Vacation or Temporary Rental) Two Limitations - Deducting costs (maintenance, repair, depreciation, insurance and utilities) n TEST # ONE - Personal Use Test – Taxpayer (“T”) uses home for less than the greater of (i) 15 days per year or (ii) 10% of the number of days the residence
Taxes and Real Estate – The Basics n n RENTED HOME (Vacation or Temporary Rental) Two Limitations - Deducting costs (maintenance, repair, depreciation, insurance and utilities) n TEST # TWO - Passive Loss Limitation (Section 280 A) investors can only deduct losses from rental activities to the extent of their income from rental
Taxes and Real Estate – The Basics n n RENTED HOME (Vacation or Temporary Rental) Passive Loss Limitation (Section 280 A) n AGI < $100, 000 not subject to 280 A and can offset ordinary/non-passive income up to $25, 000. n AGI > $100, 000 – the $25, 000 permissible deduction is reduced by 50% of the excess and completely
Taxes and Real Estate – The Basics n n HOME OFFICE Two considerations in determining Home Office Deduction n Relative importance of activity performed at each business location n Time spent at each location
Taxes and Real Estate – The Basics n HOME OFFICE n Requires no other fixed location for administration or management of business n Does not preclude meeting with customers, client or patients at a fixed location away from home n Examples n Writer / Jewelry Maker / Designer - yes
Taxes and Real Estate – The Basics n HOME OFFICE n Calculation of Home Office Deduction n Gross income derived from business n Deduct share of mortgage interest and real estate taxes on a proportionate basis n T deducts non-home related expenses of running business (business phone
Taxes and Real Estate – The Basics n HOME OFFICE n Calculation of Home Office Deduction n To the extent subtotal is positive, T is entitled to deduct a proportionate share of the residential maintenance costs, such as depreciation and utilities.
Taxes and Real Estate – The Basics n GAIN ON SALE OF RESIDENCE n Post May 7 th 1997 – Rollover provision and $125, 000 exclusion no longer apply n T can exclude up to $250, 000 ($500, 000 if T is married and files a joint return) of gain realized on the sale of a principal residence
Taxes and Real Estate – The Basics n GAIN ON SALE OF RESIDENCE n To be eligible T must have owned the residence and occupied it as a principal residence for periods “aggregating two year or more out of the five years prior to the sale”
Taxes and Real Estate – The Basics n GAIN ON SALE OF RESIDENCE n Change of Employment, health or other unforeseen circumstances and move is more than 50 miles – T is able to benefit from a fraction of the $250, 000 / $500, 000 exclusion n [(18 months / 24 months) x $250, 000]
Taxes and Real Estate – The Basics n n GAIN ON SALE OF RESIDENCE ---- Example One H&W each own a home separately and used as a principal residence before marriage. Neither spouse meets the use requirement of the other spouse’s residence. H’s gain is $200, 000 and W’s gain is $300, 000 H&W must realize gain of $50, 000 on W’s gain
Taxes and Real Estate – The Basics n n GAIN ON SALE OF RESIDENCE ---- Example Two Unmarried taxpayers A&B own a house as joint owners, with each owning a 50% interest. They sell the house after owning and using the home as a principal residence for two years. Gain from sale is $256, 000 A & B are each eligible to exclude $128, 000
Taxes and Real Estate – The Basics n GAIN ON SALE OF RESIDENCE ---- Example Three n A buys a house in 1991 and uses it as his principal residence. In 2004, A’s friend B moves in with A and A sells a 50% interest in the house, with A realizing a $136, 000 gain. In 2006, A sells remaining 50% interest to B and realizes a gain of $138, 000.
Taxes and Real Estate – The Basics n n Surviving Spouse Penalty --- ELIMINATED on sales or exchanges by surviving spouses made after December 31, 2007. The increased exclusion amount applies to a sale or exchange of property by an unmarried individual whose spouse is deceased on the date of such sale if:
Taxes and Real Estate – The Basics n 1. 2. Surviving Spouse Penalty – ELIMINATED if: The sale occurs no later than two years after the date of death of such spouse, and Immediately before the date of death, either spouse met the 2 out of 5 year ownership requirement, both spouses met the 2 out of 5 year use requirement, and neither spouse was ineligible to claim the exclusion because of another sale or
Taxes and Real Estate – The Basics n n Surviving Spouse Penalty – ELIMINATED Thus, for ownership and use, only one spouse must have owned the property for periods aggregating two years or more during the five year period immediately before the date of death. However, both spouses must have met the use requirement by using the property as a principal residence for periods aggregating two years
Tax & Estate Planning with Real Estate Assets n GAIN ON SALE OF PROPERTY SUBSTANITIALLY EXCEEDS $250, 000 / $500, 000 n Convert to rental property and hold for a sufficient period to qualify for 1031 exchange treatment.
Calculation of Gain/Loss n n n Beginning Basis n Purchase Price n Closing Costs at Purchase n Capital Improvements n Capital Assessments n Less Depreciation Ending Basis n Sales Price Less Closing Costs at Sale Gain / Loss = Ending Basis – Beginning Basis
Pre-1977 Joint Tenancies Between Husband & Wife n n Portion of the property passes to the surviving spouse by operation of law, it is sheltered from estate tax by the unlimited marital deduction. The surviving spouse gets a corresponding step up in basis for the one-half of the property which was included in the deceased spouse's estate.
Pre-1977 Joint Tenancies Between Husband & Wife n Joint tenancies between a husband wife created prior to January 1, 1977 enjoy special treatment for estate tax purposes. The value of the property is included in the estate of the first spouse to die based on the proportionate share of the purchase price furnished by the decedent.
Pre-1977 Joint Tenancies Between Husband & Wife n So if the decedent furnished all the consideration for the property, then the full value of the property will be included in the deceased spouse's estate. The income tax benefit to the surviving spouse is a full step up in basis.
Pre-1977 Joint Tenancies Between Husband & Wife n If you are dealing with a pre-1977 spousal joint tenancy, do not sever the joint interest without considering the consequences of receiving only a one-half, rather than a full, step-up in basis when one spouse dies.
Taxes and Real Estate – The Basics n FOREIGN SELLER & WITHOLDING TAX n § 1445 – the purchase of a real property interest must deduct and withhold from the purchase price where the seller is a foreign person n Avoid withholding requirement by obtaining seller certification (FIRPTA) n Withholding is 10% and furnished to IRS within 20 days of sale
Taxes and Real Estate – The Basics n FOREIGN SELLER & WITHOLDING TAX n No withholding requirements when n Value of residence transferred is less than $300, 000 n Required for a $5, 000 dirt farm n A Withholding Certificate is provided by IRS
Taxes and Real Estate – The Basics n EXTENSION OF § 121 BENEFIT TO HEIR OR ESTATE n The $250, 000 exclusion will be available to the heir or estate of such decedent or to a qualified revocable trust left by such decedent. n Two year residency period of decedent applies to heir n A qualified revocable trust may be treated
FOREIGN BUYER CONSIDERATIONS
Foreign Buyer Considerations • • • Income Tax (rental or personal use) Capital Gains Tax Withholding at Sale (FIRPTA & NYS) Estate Tax * – Tax made on transfers made by decedent at death. – Tax levied on value of the sum of (i) all property in which the decedent owned at
Current Estate Tax Regimes n The 2012 Taxpayer Relief Act makes permanent the largest exemption amounts against estate, gift and GST tax in the history of the Federal transfer tax system.
Federal Estate Tax / Rate n US Persons for Estate Tax Purposes 2013 Rate n $5. 25 Million Exclusion 40% Tax which means that if an estate is valued at $5, 340, 000 or less and death occurs in 2014, then the estate will not owe any federal estate taxes
NYS Estate Tax n An estate is required to file a New York State estate tax return if the total of the federal gross estate plus the federal adjusted taxable gifts and specific exemption exceeds $1 million, and the individual was either: n a resident of the state at the time of death; or n a resident or citizen of the U. S. at the time of death but not a resident of the state,
Foreign Purchasers n n n For an individual who was not a resident or citizen of the U. S. at the time of death, the estate must file a New York State estate tax return if the estate includes real or tangible personal property located in the state and the gross estate located in the U. S. exceeds the filing limit. The filing limit is $60, 000. Federal Estate Rate – 40% NYS rate varies (graduating to 16%)
Foreign Purchasers n n UGH it gets worse… Recourse mortgages on real estate are also generally not fully deductible against the value of the asset in determining the net taxable estate for Foreign Nationals. Estates of non-residents are allowed a deduction for recourse debts only to the extent of the ratio of U. S. assets to worldwide assets (which, in turn, requires disclosure of worldwide assets to the IRS for such determination).
Foreign Purchasers n A non-recourse mortgage (one in which the mortgage liability attaches only to the asset) may, if available, avoid this issue of apportionment and be fully offset against the value of the property.
Foreign Purchasers n It is very common for an individual to be regarded as resident for income tax purposes (based on days physically present in the United States, for example) although still considered non-resident (aka "nondomiciled") for estate and gift tax purposes. The domicile notion is indicative not of physical presence but where one intends one's permanent home to be (i. e. , in this
Foreign Purchasers n n How many days may a foreign person stay in the US without having an obligation to be a US tax filer. (i) No more than 180 days in one year and (ii) 180 rule applied to three year look back test, results in a maximum of 120 days consistently. All days spent in 2013 120 1/3 of days in 2012 40 (1/3 of 120)
Foreign Purchasers n n Lifetime gift and estate exclusions do not apply. n Foreign National estate/gift tax exclusion is only $60, 000 Do not permit single foreign purchaser ownership n Term Life Insurance n Single Member LLC
Foreign Purchasers n n n Term Life Insurance n Often least expensive & best option Single Member LLC n Must be held by foreign holding company (NOT an individual) n Capital gains tax is 35% not 20% Trust n Often most expensive option
Foreign Purchasers n Foreign Investor Passive Activity Income (Rentals) n File taxes in first year of rental activity NOT first year of rental income. n Failure to file will result in levy of 30% tax on gross income without regard to offsetting expenses. n Failure to file will also result in delay to obtain FIRPTA Waiver Certificate
FIRPTA n FOREIGN SELLER & WITHOLDING TAX n § 1445 – the purchase of a real property interest must deduct and withhold from the purchase price where the seller is a foreign person n Avoid withholding requirement by obtaining seller waiver certification (FIRPTA) n Withholding is 10% for individuals and 35%
FIRPTA n FOREIGN SELLER & WITHOLDING TAX n No withholding requirements when n Value of residence transferred is less than $300, 000 n Required for a $5, 000 dirt farm n A Withholding Certificate is provided by IRS but it takes a long time (90 -120 days)
BUYING FROM AN ESTATE
Does the Executor Have the Power to Sell Property? n n EPTL § 11 -1. 1(b)(5) and EPTL § 11 -1. 1(b)(5)(B) Fiduciary does not have authority to sell property “specifically disposed of” by Will or Testamentary Trust Fiduciary has authority to sell property on such terms as in the opinion of the fiduciary are most advantageous to those interested in the estate. Exception – Real property held in a revocable trust is not probate property and the Executor/Administrator has no power to sell such property
Overview of the Federal Estate Tax (2014) n n n Basic Exclusion amount is $5. 34 million 40% estate tax maximum rate Federal Estate Tax Return (Form 706) due date is 9 months from Date of Death
New York State Estate Tax n n n Exclusion – $1 million --New York Tax Law § 951 (a) NYS Estate Tax Return due date is 9 months from Date of Death A NYS Estate Tax closing letter or discharge letter will be issued after the NYS Estate Tax return is approved by the Department of Taxation & Finance.
New York Surrogate’s Court Proceeding Probate proceeding - Letters Testamentary issued to Executor under Will who has authority to collect and sell real and cooperative personal property.
Trustee of Revocable Trust n n A Trustee has the authority to sell property held in a revocable trust No Court issued Letters of Trusteeship No Court approval of Letters of Trusteeship Attorney should obtain copy of trust agreement to verify if the trustee has the power to sell property out of the trust
Use of a Power of Attorney by a Fiduciary n n A fiduciary cannot delegate his or her duties as fiduciary As a general rule, “[t]o qualify as a fiduciary is a serious matter and if one lacks the time or inclination necessary to devote to the affairs of an estate, he should refrain from accepting his nomination or resign. The facts in each estate will determine whether or not the retention of agents is warranted. ” Review the Will to see if All Fiduciaries are Required to Sign Documents Exception - A fiduciary may delegate duties that are considered ministerial in nature
Transfer of Cooperative Apartments n n n Can Cooperative apartments be transferred to revocable trusts? Board approval is required and in some buildings the transfer is not permitted under Board Rules A Revocable Trust is a Grantor Trust
Who can Sell a Cooperative Apartment when the Unit Owner Dies? An Executor/Administrator has authority to sell the unit if it is held in the decedent’s name alone (check record owner on stock certificate and proprietary lease)
Federal Release of Lien – Form 792 US Certificate Discharging Property Subject to Estate Tax Lien n n n Required Documents Copy of first page of Form 706 Form 4422 signed by the Executor Copy of Death Certificate Original Letters Testamentary Copy of Contract of Sale Copy of Last Will and Testament Copy of Form 2848
Federal Release of Lien – Form 792 US Certificate Discharging Property Subject to Estate Tax Lien n A Federal Release of Lien cannot be obtained if the Estate is not required to file a Federal Estate Tax Return The current Estate Tax Return exemption is $5 million You Do Not Have a Contract of Sale
Requirements to Transfer Shares of a Coop Apartment n n Original stock certificate Original proprietary lease Death Certificate with raised seal (original). Attorney certified copy of Last Will and Testament and any Codicils.
Requirements to Transfer Shares of a Coop Apartment (Continued) n n n Certificate of Letters Testamentary or Administration dated within six (6) months of closing (original)* Affidavit of Debts and Domicile executed by an Executor or Administrator (original) US Certificate Discharging Property Subject to Estate Tax Lien (Form 792, original) or IRS Estate Tax Closing Letter Original proprietary lease NYS Release of Lien of Estate Tax (Form ET-117, original ) If decedent died prior to February 1, 2000: NYS Estate Tax Waiver (Form ET-99, original) or a NYS Estate Tax Closing Letter *It is good practice to update Letters if dated more than 30 days from closing date
New York State Release of Lien – Form ET-117 n n n Obtained through NYS Department of Taxation & Finance Must be filed with either a Form ET-706, ET-30 or ET-85 Obtain forms from NYS Dept of Taxation & Finance website Usually takes about 3 weeks to obtain No requirement for a signed Contract of Sale
Important Things to Consider when an Estate is the Seller n n n DBA: “Don’t Be Afraid” to discuss issues with estate counsel and/or the title company in advance to get an overview of the estate and get pertinent documents reviewed Intervening Transfers – are they necessary and what documents need to be prepared ? Talk to Executor to find out what, if anything they know about the property as this will affect the level of reps and warranties given in a contract Title Insurance – the ultimate “Belt and Suspenders” (even for co-ops) Timing – estate transactions may take longer than standard ones Attorneys for buildings need to be aware of estate issues and logistics
Contract of Sale– Seven Common Issues I. Who is the Seller? n Seller should be “John Doe, as Executor of the Estate of Jane Doe” or “John Doe, as Trustee of the John Doe Trust Under Agreement Dated (“u/a/d “) ____, 2011. [Use EIN not SS#] Suggested Contract Language: n Purchaser acknowledges that John Doe is only acting in his capacity as executor of the Seller in connection with this transaction. Accordingly, Purchaser, for themselves and theirs, successors and assigns hereby releases, relinquishes and waives any and all recourse against John Doe in his individual capacity. (BUYER TO ADD: “…except for those claims as may be made pursuant to Section 11 -4. 7 of the New York Estates, Powers and Trust Law”)
Contract of Sale– Seven Common Issues II. PCDA Not Applicable on Fiduciary Transactions n n NY Real Property Law Section 463(7) states that the $500 Property Condition Disclosure Act (PCDA) credit is not applicable in “transfers by a fiduciary in the course of administration of a decedent ’s estate, a guardianship, a conservatorship or a trust” (Note: may not be applicable for grantor trusts) Fiduciary is generally not in a position to make representations or disclosures about the condition of Property so why should they be required to give a credit?
Contract of Sale– Seven Common Issues III. Representations and Warranties n n “Take it or Leave it “ Most Fiduciaries have not lived in the property to be able to make customary reps that a seller would otherwise be able to make such as leaks, noise complaints, etc. Credits vs. Repairs—Always opt for credits Without representations Buyer must conduct greater level of due diligence and engage brokers to do more heavy lifting
Contract of Sale– Seven Common Issues III. Representations and Warranties SUGGESTED CONTRACT PROVISION It is understood and agreed that (i) no equipment, furnishings, furniture or personal property are included in this sale, except as is specifically set forth in Paragraph ___ of the printed form of Contract, and (ii) Seller is not obligated to install any equipment or appliances in the Unit or otherwise make any repairs or improvements to the Unit or to the appliances, equipment and fixtures contained in the Unit.
Contract of Sale– Seven Common Issues III. Representations and Warranties ANOTHER SUGGESTED CONTRACT PROVISION Purchaser acknowledges that the floors, doors, walls, ceilings and other surfaces at the Unit are being sold in their “AS IS” conditions and Purchaser agrees that Seller shall not be required to repair, repaint or refinish the floors, doors, walls, ceilings or any other surface at the Unit. Purchaser shall accept the walls in the Unit subject to minor chips, holes and/or indentations as are ordinarily created by the removal of hanging pictures and other removable items being taken by the Seller.
Contract of Sale– Seven Common Issues III. Representations and Warranties AND ANOTHER SUGGESTED CONTRACT PROVISION Seller represents and warrants that (i) Seller has all right, title and interest to the [Property] and has the authority to enter this Contract, and to transfer ownership of the Property, (ii) all debts and claims of the estate of John Doe (the “Estate”) have been provided for, (iii) all estate, transfer, death and other taxes of the Estate shall be paid from funds of the Estate and (iv) all tax proceedings will be timely completed. Seller agrees to indemnify and hold Purchaser harmless, including reasonable attorney fees, from any debts, expenses and liens against the Property that are or may be owed by the Estate. This provision shall survive Closing.
Contract of Sale– Seven Common Issues IV. Storage/Servant’s Room - Is there an Affirmative Ownership Interest? SUGGESTED CONTRACT PROVISION At Closing, Seller shall transfer to Purchaser whatever rights and interests, if any, Seller may have to the storage area/servant’s room located at the Premises. No additional consideration will be paid by Purchaser for the acquisition of the storage area/servant’s room
Contract of Sale– Seven Common Issues V. Estate Documents To Be Provided n n n Death Certificate Last Will and Testament Certified as True and Correct Letters Testamentary within 6 Months of Closing Date (30 days is best practice) IRS/NYS Lien Waivers (or applicable Affidavits) Affidavit of Debts and Domicile
Contract of Sale– Seven Common Issues V. Estate Documents SUGGESTED CONTRACT PROVISION When Representing a Seller: Seller will provide Purchaser with (i) a certificate of letters testamentary concerning the Seller dated within 6 months of the Closing Date, (ii) a copy of the Last Will and Testament of John Doe certified by estate counsel as being a true and correct copy, (iii) a copy of the death certificate of John Doe and (iv) any other documents that (the managing agent/title company as applicable] may deem reasonably necessary to effectuate the transfer of the Property.
Contract of Sale– Seven Common Issues V. Estate Documents SUGGESTED CONTRACT PROVISION When Representing a Purchaser Seller will provide Purchaser with (i) a certificate of letters testamentary concerning the Seller dated within 6 months of the Closing Date, (ii) a copy of the Last Will and Testament of John Doe certified by estate counsel as being a true and correct copy, (iii) a copy of the death certificate of John Doe, (iv) a release of lien with respect to the Property, issued by the New York State Department of Taxation and Finance, (v) a Federal release of lien issued by the IRS or an affidavit confirming that no such release is required and (vi) any other documents that [the managing agent/title company as applicable] may require to effectuate the transfer of the Property and/or the issuance of the Title Company ’s Title Policy. Note that Schedule B of a Title Report may ask for additional documentation
Contract of Sale– Seven Common Issues VI. Coop Leasehold Insurance Policy With Coop Apartments Always Suggest Coop Leasehold Insurance – Belt and Suspenders SUGGESTED CONTRACT PROVISION Purchasers’ obligations to Close title to the Unit, Shares and Lease shall be contingent upon the issuance of a title policy or a binding commitment for same (the “Title Policy”) at Closing upon concurrent payment of the standard premium therefor, insuring Purchasers ’ title to the Unit, Shares and Lease in the amount of the Purchase Price subject to no Judgments, Liens, Claims, Encumbrances or other matter not expressly permitted by this Contract; the Title Policy shall be the title company’s current form of Coop Leasehold Insurance Policy with any endorsements required by Purchasers, if any, as are then customary and available in New York.
Contract of Sale– Seven Common Issues VII. Domicile of Decedent n n Get a representation that the Decedent was a NY Domiciliary or it may raise out-of-state probate issues IT 2663/2664 Estimated Income Tax Return may come into play Suggested contract provision: n Seller represents and warrants that at the time of his death, John Doe was a domiciliary of the State of New York. This representation shall survive the Closing.
The Closing n n n n Get all relevant estate documents together and over to the applicable parties as soon as possible to address any issues Timing of signatures when you have multiple fiduciaries– for deeds, transfer tax returns and related documents, chances are all executors must sign so be cognizant of preparation and turnaround times Try to get as many documents as possible pre-signed (even do a Seller ’s pre-closing) Power of attorney not permitted except for ministerial documents Deed must recite actual consideration not just the standard $10 In co-op transactions, make sure executor has stock/lease Closing proceeds instructions
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