There are a few exceptions, like an uncontested quiet title action or uncontested probate, but generally the length of time and amount of work involved in a case depends very much on what the other side does. If the opponent files a motion, you will have to respond. That slows things down and creates more work — i.e. more fees.

The same is true for actions the judge takes in the case.  Judges impose deadlines and, sometimes, take other actions.  The lawyer has to respond accordingly.

And, what if you settle the case along the way?  What about appeals?  What if the case is removed to federal court?

You get the idea.  It is essentially impossible to tell a client just how much a lawsuit will end up costing.  However, that does not mean you cannot have some idea of what to expect.   That is the purpose of this article.

General Rule 1:  It is less expensive to defend a case than to prosecute a case.  It is up to the Plaintiff to move the action forward, so the pressure is on the Plaintiff to get things done.  With some exceptions, it is usually less work for a Defendant because the Defendant has the luxury of doing nothing until the Plaintiff forces the issue.

General Rule 2:  State court is less expensive than Federal court.

Now, the different stages of a lawsuit are predictable, so we can break down what happens at each stage and come up with some ballpark idea of the costs and fees for each — though always with the caveat that things can be more or less expensive depending upon what the other side does.

Stage 1 – Initiation

If you are the Plaintiff, then your lawyer will need to draft the Complaint and Summonses to get things started.  Depending upon the complexity of the case, that could take around five (5) hours of work.   Remember, the lawyer (and staff) first has to understand the case and go through the evidence to determine a strategy.  Then, the writing can begin.  So, it is going to be a couple of grand or so just for the research and drafting.

Then, when the Complaint is ready, the Court charges a filing fee.  The amount may vary a bit, but it is probably in the range of $400 to $600.  (Caveat:  It’s much more than that if your the plaintiff in a foreclosure action.)

After that, the Complaint and Summons have to be served by a process server.  You can have the Sheriff’s department do that, which is cheaper, but they take longer . . . and you cannot really bug them to hurry up.  Most people go with a private process server, which will cost around $100 per defendant.

So, if you add it all up, you are looking at something like $2,500-3,500 to get the case off the ground.

If you are the Defendant, then you only need to file a response to the Complaint.  There are a few different types of responses you might file, such as a Motion to Quash, Motion to Dismiss, or an Answer with Defenses.  Your lawyer will decide which approach is best, but any one of these responses is about 1-3 hours of drafting.  So, you are looking at about $800-1,000 for each of these responses.  Bear in mind your attorney may use just one of these responses or, perhaps, all three, depending upon the situation and your overall case strategy.

Stage 2 – Discovery

This is the stage where the parties get information from the other side or third parties.  There are cases that require only minimal discovery or, even, no discovery at all.  Also, the type of discovery utilized makes a big difference in costs.  So, results may vary wildly at this stage.

There are three types of written discovery requests:

• Interrogatories,
• Request to Produce, and
• Request for Admissions.

These “discovery products” are somewhat predictable and template-based.  So, it is simply a matter of drafting requests that are specific to your case.   You can expect about 2-3 hours of work ($800-1,600) per discovery product.  Your lawyer will decide whether to use some or all of these discovery options.

Depositions  –  Another common discovery tool is taking a deposition.  That’s a different beast altogether. 

First, you may have to issue a subpoena, which is additional drafting.  And, you’ll need a court reporter present to transcribe the proceedings.  That’s an added costs.  Nowadays, depos are often done by videoconference, which makes things more convenient but — in my experience — not really less expensive.

But the main thing is that grilling a deponent in person is very often a full-day affair (or, even, multiple days).  Once you go to the trouble of getting the person in the seat and under oath, you will want to take full advantage.  And, usually, the deponent will put up some resistance, which slows things down.

So, you can expect a single deposition to cost between $1,000-5,000.  Depos are much more expensive but, depending on the deponent and the case, the can be very effective.  Think about it.  Nobody likes being deposed, so you can really put some pressure on the other side with this technique.  If that leads to a quicker settlement, then it was worth every penny.

Rounds of Discovery

For complex cases, you may have to go through more than one round of discovery.  So, your lawyer may be sending out a first set, second set, third set, etc.  If so, multiple the estimate above by the number of sets that go out.

Motion Practice

Another thing to keep in mind is the motion practice that can happen at this stage.  For example, if the party receiving the discovery request does not respond, or does not provide good responses, then your lawyer will have to file a Motion to Compel and, probably, go to a hearing.  That additional motion practice means additional expense.  Call it about $1,000 for a motion to compel and hearing attendance, assuming remote appearance (Zoom) is permitted.

Stage 3 – Summary Judgment

Some cases can be disposed in whole or in part without going all the way to trial, such as cases based on a contract.  That usually happens by filing a Motion for Summary Judgment.  If you are the Plaintiff, you are hoping to end the case with this motion, so your lawyer is going to put some extra time into researching and drafting this motion.  Again, if this works, it will be worth every penny, so you might as well give it your best shot.

Then, there will be a hearing on the motion.  I would estimate the whole process will take from 3-6 hours of work ($1,200-3,000), depending upon the complexity of the issues.

Stage 4 – Trial

Summary judgment is for cases that do not involve evidentiary issues.  In other words, the judge is not required to hear testimony or deal with disputed facts.  Whenever that is not possible — which is most often — then the case will have to be decided through a trial.

H&S deals mostly with business and real estate disputes, which do not typically call for a jury.  So, the analysis here is on non-jury trials.  Just bear in mind there are additional steps (and, therefore, additional cost) involved for jury trials.

Preparation

All the exhibits and witnesses have to be prepped.  The research has to be finalized and all the evidence reviewed — i.e. we want no surprises at trial.  The strategy needs to be discussed, and everybody involved, including you, has to be ready to go.  It’s a big deal.

Show Time

Then, there is the trial itself, which can take one day or a week, depending on the case.  So, again, results can vary wildly.  But, just to give you some idea, this stage is likely to cost somewhere in the range of $3,000, for a relatively simple case, to $10,000 for a fairly complex case.  I’m referring, of course, to typical small business litigation in State court.  Obviously, big corporate cases are a different statosphere.

Other Costs

Another thing you probably need to count on is mediation.  At some point, one of the parties will ask for mediation, or the judge will simply send you to mandatory mediation in the hope of getting the case settled and off the docket.  That will be a full day of work, plus the mediator’s fees, so count on $2,000-$3,500 for that.

Then, there are appeals.  There is even something called an “interlocutory appeal,” which can happen before the case is actually decided.  So, there can be costs of appeal both during and after the case.  There is no “motion practice” in appeals, and oral arguments are somewhat uncommon, so the costs are fairly predictable.  But, appellate work is notoriously expensive because the level of “lawyering” goes up.

Conclusion

Hopefully, the analysis herein helps you to better understand the factors involved in litigating a case, so you can better prepare and make informed decisions.  Never forget that a case can settle anywhere along the way, which puts an end to the expenses.

I’ve also done a video on this topic, which you can access here.

~ Jeff Harrington, Esq.

¿Cómo se puede combinar unas empresas (LLC) con unos fideicomisos (land trust) para conseguir el resultado óptimo?  La respuesta está aquí.

E-signing technology is becoming more and more prevalent, and there is no denying the convenience.  Affixing your signature with a simple tap on your phone screen is a beautiful thing.  After all, the alternative is to print the document, sign it, scan, and then email the scanned copy.  Sometimes you have to go find witnesses, and, if notarization is required . . . well, now you really got yourself a project.

So, naturally, we would all prefer to e-sign documents.  However, the convenience may not be worth it if e-signatures are not enforceable.

Legal Analysis

The legal analysis here is actually the easy part.  The Electronic Signatures in Global and National Commerce Action (ESIGN) has been in place at the federal level for over 20 years.  The same is true for the Uniform Electronic Transactions Act (UETA), which has been adopted at the state level by all but two States.  Simply put, the legislation says:

A record or signature may not be denied legal effect or enforceability solely because it is in electronic form.

So, from a legal point of view, an electronic signature has exactly the same validity as a handwritten signature.

Practical Application

Here, the analysis gets a bit more interesting.  After all, the goal is to bind people to the rights and obligations in the agreements they sign.  What we really care about is enforceability.

Is it easier for someone to weasel out of a contract with e-signing than it would be with a handwritten signature?  The answer to that question turns on how easily the person can say: “Hey, that’s not my signature.”

In the end, what a judge wants to know is whether or not the parties intended to be bound by the agreement.  Assume for a moment some people might be willing to lie in order to get out of a contract.  Shocking, I know, but it could happen.  So, now, you have to prove that the person actually meant to sign the contract.  How can you do that?

The traditional method of having witnesses and/or notarization is a pretty iron-clad way of proving that someone voluntarily signed a document.  These methods of “acknowledgement” are still very good evidence nowadays, but they are not as undeniable as they once were.

The reason is that, with software available today, it is not particularly difficult to take a picture of someone’s actual signature and affix it to another document. 

Someone looking to commit fraud could use PDF and/or JPEG manipulation software to fake signatures of both the signer and the witnesses.  The same is true for notarization.  All one would really need is a picture of the notary’s stamp.  With that, and maybe a little old-fashioned forgery, a fraudster could put together a document that appears to have been signed, witnessed and notarized.

So, the traditional methods are still good, but they are no longer airtight.  In fact, they never have been (e.g. Catch Me If You Can).  If someone wants to fake a document, they can.

If signatures can be faked, then the person you are trying to hold to a contract can say: “That does look like my signature, but I didn’t sign the contract.”  So, now what do you do?

Modern Solution

Since there is no way to ever know with 100% certainty that a signature is authentic — even with witnesses and notarization — should we not take advantage of the convenience we get through e-signing?

On top of the convenience, in some important ways, e-signatures can be even more secure than handwritten signatures. 

For one thing, the e-sign apps generate a Certificate of Authenticity showing when and where the electronic signature was affixed.  That is certainly not proof positive, but it might be just about as good as notarization.

Now, I know what you are thinking.

E-sign apps depend solely upon email addresses, so it might be very easy for a person to get out of a contract by just saying “Someone hacked my email” or “Another person who has access to my email account signed, but I didn’t authorize that.”

Best Evidence

That brings us to the crux of this article.  What if, in addition to the other party’s e-signature, you also have an email thread showing discussions leading up to execution of the document?  How is the other party going to wriggle out of that evidence?

Even if you only have a single confirmation email saying something like “I received the document you e-signed earlier today,” any judge would find that to be very compelling evidence.

As long as the other side does not respond to your email with something like: “What are talking about?  I didn’t sign anything,” then those written communications are likely to be very hard to overcome.  In most cases, you will have a fairly extensive thread of communications, both before and after electronic execution, so you should be in very good shape if you later have to enforce the contract.

Conclusion

So, when you get down to the actual purpose of a signature, which is to demonstrate a person willingly entered into an agreement, today’s e-signing apps are not only amazingly convenient and environment-friendly, but they also tend to authenticate signatures more effectively than the traditional methods.

Of course, there are many agencies that have not caught up with the times.  For example, we still have to submit immigration documents, loan documents, and others with wet ink originals.  But, it is clear e-signing technology is the future, and we are all be better off for it.

     ~ Jeff Harrington, Esq.

¿Estás pensando en demandar a alguien? ¿O tuvo una mala experiencia en un pleito? No se pierda esta discusión inusualmente franca sobre los lados buenos, malos y feos del litigio.

The purpose of this article is to make both parties aware of the common considerations after default on a commercial lease. 

Uncollectible Tenants

Personal Guaranty

It is hard to blame a commercial landlord for insisting on payment of every dime owed, but that does make it nearly impossible to cut a deal quickly.  So, very often, we end up with Scenario #2, which is protracted litigation.

Real Estate Litigation

Once the lawsuit starts, it’s basically for “all the marbles” because the landlord will be entitled to ALL the costs and fees resulting from this lawsuit, along with unpaid rents and other damages.

But, be aware, landlords.  Sometimes the commercial tenant does have an exit strategy.

I realize that all sounds good from the landlord’s perspective.  Just remember, though, getting a judgment is one thing.  Collecting on the judgment can be quite another.

Executing on the Judgment

The tenant may start transferring assets out of the landlord’s reach.  If you start seeing the tenant’s attorney utilizing delay tactics in the lawsuit, it may be that the tenant needs time to get the asset-protection plan in place.  

Conclusion

Previously, we looked at 10 advantages of a land trust [Florida land trust].  The purpose of that article was to make people aware of the possibilities with this truly useful vehicle through analysis of an LLC vs. Land Trust.

I find that clients who are unfamiliar with trusts will almost invariably decide in favor of an LLC.  When it comes down to it, clients would rather go with an inferior solution they understand than something that sounds exotic or too good to be true.

That’s understandable.  So, let’s increase awareness.

LLC vs. Land Trust

When viewed side-by-side with an LLC, I think you will find a Florida land trust is not such an exotic creature after all.  Part of the problem may simply be vocabulary.  Juxtaposing equivalent terms may provide real estate investors with a better understanding of, and greater comfort level with, land trusts.

Limited Liability Company (LLC) vs. Land Trust

LLC  –  OWNER/MEMBER

The person who puts in the time and start up capital to launch a limited liability company is usually referred to as the “member” or “manager.”  Owners will often use additional titles such as “president” or “CEO” because they are more commonly recognizable.  There is a technical difference, which we will get into a bit below.  For now, the point is that limited liability companies have “owners.”     

Land Trust  –  GRANTOR

In simple terms, we can say the “grantor” of a trust is equivalent to the owner of an LLC.  There is such a thing as a “non-grantor trust,” but, for a simple land trust, the grantor is the one who sets up the trust, just as an owner sets up an LLC.  

There is one difference worth mentioning.  Trusts were originally designed for estate planning.  So, the trust will have a “beneficiary(s),” such as the grantor’s children or wife, for example.  One common set up is where the grantor takes the profit/proceeds generated by the trust during the grantor’s lifetime and, after the grantor dies, the assets of the trust go to the beneficiaries.  

This simple set up adds an estate planning feature to the land trust that you do not get with an LLC.

LLC  –  OPERATING AGREEMENT

The Operating Agreement contains the company’s bylaws.  Along with the Articles of Organization, the Operating Agreement provides the key terms that govern the company.  For example, that is where you will find provisions about decision-making authority, election of officers, dissolution of the company, etc.

It is possible to do a bit of succession planning with an operating agreement, such as naming a successor president.  There is a limit to how far you can plan succession with an operating agreement, though, because it just gets weird.  You soon run into family scenarios that seem out of place in a business document.  

Judge’s do not expect to see a bunch of estate planning provisions in a company’s operating agreement — i.e. healthcare, custodial duties, rights of heirs, etc.  So, it is uncertain whether those provisions would be enforced by a court.   

Trust  –  TRUST AGREEMENT

The equivalent of an operating agreement is the “declaration of trust” or “trust agreement.”  (same thing)  The trust agreement has provisions similar to those of an operating agreement about management of the trust’s business affairs.  The difference is that trusts are typically used for estate planning, so you can readily include provisions regarding heirs, healthcare, funeral arrangements, guardianship, and  other things you would normally expect to see in a will.  There is nothing weird about estate planning through a trust, so you can be sure a judge would indeed enforce those provisions.  

If you are using land trusts strictly for real estate investment, you will probably use a straight-forward business trust, which will not likely have much estate planning to it.  But, should you so choose, you can get double-duty out of a trust agreement in a way you cannot with an operating agreement.

LLC  –  PRESIDENT/CEO

Entities cannot speak for themselves or sign documents, so they have to be represented by one or more human beings.  For this reason, a  president and/or other corporate officers are named to act on the company’s behalf.  

Often, the president is the owner of the company, but that is not necessarily the case.  The president could simply be an employee who has no ownership interest.

Trust  –  TRUSTEE

Like the president of a company, the “trustee” acts as the representative of the trust.  Many times the grantor will act as the trustee.  In that case, the trustee is for all practical purposes the “owner” of the trust.  There is some flexibility here, though.  There can be situations where the grantor would not want to be the trustee, just as an owner of a company may not want to be president.

If asset protection is a concern (when is it not?), then the grantor should appoint someone else to be the trustee.  Or, if it is not convenient for the grantor to run the operations, it may greatly simplify things to have a local person act as trustee.  Likewise, if the grantor wants a smooth transition when he/she dies, then using someone else as trustee — or naming a successor trustee — is an excellent solution.

You can name anyone you want as a trustee, though there are some good reasons to make it an attorney, accountant, or trust company, rather than a friend or family member.  That is a topic for a different article, though.

LLC –  EMPLOYEES & CONTRACTORS

Obviously, these are the workers who carry out the company’s business activities.

Trust  –  EMPLOYEES & CONTRACTORS

A trust can also employ workers, though that would not be common for a land trust.  Usually, a trust will hire outside companies or contractors to manage properties, provide maintenance and repairs, invest trust funds, etc. 

LLC  –  PARTNERS

Naturally, you can have more than one owner (i.e. partners) and divide the ownership interests however you decide. 

While it is common for partners of the LLC to have different percentages of interest in the company, or to have different voting rights, it would not be common to stipulate to much more than that.  

Trust  –  BENEFICIARIES

The beneficial interest given to the beneficiaries of a trust is similar to ownership interest divided among partners in an LLC.  You do, however, have much more control over beneficial interest.  You can name as many beneficiaries — and their successors — as you want, and you have complete control over _

• • how much they receive
  • how they receive it
  • when they receive it
  • what conditions must be met
  • who you want to act as custodian, if a beneficiary is a minor
  • skipping generations

That is probably far enough for now.  You can read about cost savings and flexibility of land trusts here.

For now, the purpose is to understand some of the inner workings of a land trust and realize it is not so entirely different from an LLC .  There is nothing particularly exotic about a land trust.  Just the terminology is different.

And, where there are differences, the land trust has the advantage.

 ~ Jeff Harrington, Esq.

I. Overview of FIRPTA

Simply put, FIRPTA is legislation intended to insure foreign owners of US real property pay the capital gains tax when they sell their property.  After all, there is a natural temptation for someone living abroad to simply sell the property and disappear without paying tax.

The IRS knows this, so they have put the obligation on the buyer and the title agent to withhold 15% of the sale price (10% for qualifying transactions) as a sort of escrow for payment of capital gains tax.  So, it’s not the seller that gets in trouble if the withholding is not done.

Since it can be hard to go after the foreign seller, the law is aimed at the parties the IRS knows it can find and punish.

For the most part, the 15% is calculated on the sale price, not the profit realized by the foreign seller.  So, usually, the withholding is a substantial amount, which is why clients come to us for help.

For a title agent, dealing with foreign sellers represents tremendous liability.  In fact, our office often receives referrals from title companies that are less familiar with international transactions.

Title agents who are unaccustomed to dealing with FIRPTA can get freaked out and end up making the process more slow and painful than it needs to be.

II. The Typical Scenario

Sometimes the foreign investor does not know about FIRPTA when making the purchase.  So, instead of creating a domestic land trust or LLC to purchase the property, the buyer just makes the purchase in his or her own name.   Given the choice, that approach is not the best for many reasons.  Click here for other options.

However, there are other times when purchasing through a land trust or company is not an option.  For example, some lenders may require the borrower be a natural person.  It is not impossible to get a mortgage in the name of a company or trust, but it can certainly be more difficult.  That said, since foreign buyers usually do not rely on US financing for their purchases, this is not generally an issue.

When it is time to sell the property, these are the questions to ask:

(i)  Can I avoid the withholding requirement altogether?

(ii)  If I can’t avoid withholding, can I minimize the amount withheld?  (10% instead of 15%)

(iii)  If I can’t avoid withholding, can I at least get a quick refund?

Of course, each situation is a bit different, so do not hesitate to contact our office (free consultation) when you have a situation with a particular closing.  But, if you are looking to generally educate yourself, this article is for you.

III.  Withholding Requirement

First of all, how do you calculate the the withholding?  The IRS uses the term “amount realized” from the sale, which is defined as:

• The cash paid (usually the purchase price);
• The fair market value of other property; or
• The amount of any liability assumed by the transferee after the transfer.

Sellers often say to us “But, I’m not making any money on the sale.”  Ultimately, the amount of tax liability will depend upon the profit or loss from the transaction.  But, that determination happens at the end of the fiscal year when you file your tax return.  Unfortunately, for purposes of the FIRPTA withholding, you do not get to “self-declare.”

So, you may very well get the withholding back after you file your tax returns.  But, at the time of the closing, the IRS wants to hold onto 15% (or 10%) of the sale price for you. 

Who is a “US person”?

If the seller is any of the following, then FIRPTA does not apply:

• a citizen or permanent resident of the US
• a non-resident who meets the “substantial presence” test
• a domestic, multi-member LLC
• a domestic partnership
• a domestic corporation
• a trust domiciled in the US that has at least one trustee who is a US person
• any estate that derives income from within the US

Who is a “resident”?

If you have a green card (i.e. permanent resident), then you are a US person, irrespective of how many days you have been physically present in the US.

If you are not a permanent resident, but have spent 183 days or more in the US in the past three years, then you are considered a “US person” for tax purposes.  The calculation of the 183 days (i.e. the “substantial presence test”) is a bit complicated:

• a minimum of 31 days in the current calendar year
• each day present in the current year is counted as a full day
• each day present within the preceding year is counted as one-third of a day
• each day present within the year that is two years prior to the current calendar year is counted as one-sixth of a day

Tip: The easiest way to do the math is to access Homeland Security’s I-94 page online.  That will give you a clear record of the time you have spent in the US during the most recent five (5) years.

What if the property has more than one owner?

If the property is owned jointly by U.S. and foreign persons, the “amount realized” is allocated between the seller parties based on the capital contribution of each.

Example:  If there is one US investor and one foreign investor, and they each put in 50% of the price to acquire the property, then the “amount realized” for FIRPTA purposes will be half the sale price.

What if the owner is a company?

If the seller is a foreign corporation, then the company must withhold 35% of the gain it recognizes on the distribution to its shareholders.  So, using a foreign corporation as your investment vehicle is usually not smart.

IV. Exceptions

Residence that costs less than $300,000

Probably the most common exception is where the buyer intends to live in the property as a home, as opposed to acquiring the property for rental/investment purposes.  That will work, but only if the sale price is less than $300,000.

Additionally, for the first two years, a family member has to live in the property “for at least 50% of the number of days the property is used by any person.”  So, that means, the days the house is vacant do not count, but you cannot have a tenant in the property for more time than you or your family use the property.

Limited Liability Company as Seller

This is where things get interesting.  Real estate investors often hold their properties in LLCs, so this is the section that merits the most careful analysis.

First of all, if the LLC is registered in a foreign country, then it is subject to the FIRPTA withholding unless it is a single-member LLC and the owner is a US person.

The real question, though, is what to do with domestic companies.

Domestic LLCs

Disregarded Entity.  Under the tax code, there is the concept of a “disregarded entity.”  If the LLC has only one owner (i.e. member), and the owner has not made any special elections with the IRS, then the LLC will be considered a “disregarded entity.”  In that case, whether FIRPTA withholding is required or not will depend upon the status of the owner.  If that individual or entity is a non-US person, then the LLC is subject to the withholding.

Multi-Member LLC.  By contrast, if the LLC is has more than one owner, then the default classification (i.e. no specific election taken) is “partnership,” not a “disregarded entity.”  So, a multi-member domestic LLC will generally not be subject to withholding.

An LLC formed in the US can safely sign the non-foreign affidavit and forgo withholding if _

1. 1. 1. It has only one member and that member is a US person
      2. It is has more than one member 
      3. It has made the election to be taxed as a corporation (i.e. C-corp)

Sworn Statement

If the seller provides a declaration that he or she is not a foreign person, and provides a tax ID number (i.e. social security or EIN), then that will get the buyer and title agent off the hook.  Obviously, if the information is false, the seller will be guilty of perjury and could have problems with the IRS.  The same is true if the buyer and/or title agent actually knows the information is false.

No Gain or Loss

If the transfer was to a family member, or some other situation where there truly was no profit or loss on the transfer, then the seller can provide a notice to that effect.  In that case, the buyer and title agent will not be liable.  Just be sure a copy of that notice gets filed within 20 days of the closing at the Ogden Service Center, P.O. Box 409101, Ogden, UT 84409 .

This exception may also apply in short sales, but that is not automatic because the calculation is based on the sale price rather than proceeds.  So, contact our office on that one.

V. Waivers 

This is where your experienced, resourceful lawyer can really be helpful.  There are certain mechanisms available for obtaining waiver of the withholding requirement.  There are three in particular that provide some wiggle-room.

• The amount to be withheld is greater than the tax liability.  The withholding is calculated on the full sale price, even though you may have a mortgage to pay off.  Ultimately, of course, you will only have to pay tax on your profit, not the full sale price.  So, it could very well be that your tax liability is lower than the amount of the withholding.  When that is the case, we should be able to get you a waiver.

• Agreement to pay tax with conforming security.  Since the whole idea of FIRPTA is to make sure sellers pay the capital gains tax, the IRS will consider waiving the withholding requirement as long as it has other assurances the tax will be paid.  These are the forms of security that are generally acceptable:
  • bond with surety or guarantor
  • bond with collateral (the Ibis property would probably work)
  • letter of credit (if you have funds abroad, this may be an option)

Under this scenario, we (the title company) would first determine the exact amount of tax due on the transaction, and then make arrangements to provide assurances that the tax will be paid before April 15.  If we can do that to the satisfaction of the agent, the IRS will issue a waiver.

• Nonstandard application.  This analysis really has to be done case-by-case, though I can give you an example.  One client wanted to sell his property in order to raise enough money to meet the requirment for an investor visa (E-2). In that case, the argument was really quite compelling.  After all, the IRS just wants to know the seller will not disappear without paying tax.  Well, if the very reason for the sale is to be able to remain in the US on a long-term basis, that is pretty good assurance the seller will pay his taxes.  So, we were able to obtain a waiver.

Bear in mind it does take a little time to get the certificate back (up to 90 days) so, if you decide waiver is the way to go, you will want to get the application together sooner rather than later.

VI. Amount of Withholding

There is one situation where the amount of withholding is 10% instead of 15%.  That is where the buyer plans to live in the property (see details above), and the sale price is greater than $300,000 but less than $1 million.

Otherwise, at the time this article is published, the withholding is always 15%.

VII.  Refund of Withholding

In general, you would apply for refund after filing your return and paying any tax due.  So, how quickly you get your money back–assuming you are entitled to a refund–depends up on you . . . to a point.

You do not have to wait until April of the following year, but you do have to wait until the end of the fiscal year in order to file a complete return.  Some exceptions may apply, depending upon your circumstances, but that is the general framework.

Also, there are some mechanisms for early refund but that, again, would really only apply if the withholding were greater than the tax liability.  The criteria and process would be the same as in § V above.  If you do file for an early refund, the IRS has 90 days to respond.

 VIII.  Conclusion

As usual, the moral of the story is to seek out a lawyer sooner rather than later.  Certainly, if you are a foreign investor, it would be worth your while to meet with an H&S attorney to go over options regarding structuring your real estate investments.

~ Jeff Harrington, Esq.