¿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.

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.

Under Section 1031 of the tax code, you can sell your property and reinvest some or all of the proceeds in another property without paying taxes on the reinvested money. Here is how.

 Who qualifies?

Anyone and anything.  Individuals, C corporations, S corporations, partnerships (general or limited), LLCs, trusts and any other taxpaying entity are entitled to defer taxes through a 1031 exchange.

Timing

The simplest thing is a simultaneous swap of one property for another. That can be tricky to arrange sometimes, though. What if you are ready to sell but not yet ready to buy?

The rule is the sale of Property A and purchase of Property B must be mutually dependent parts of an integrated transaction. If you are not doing a simultaneous sale-purchase, then you will typically use an exchange facilitator and an exchange agreement. Here are the highlights.

• You have 45 days from the date you sell Property A to identify a potential Property B. The identification must be in writing, signed by you, and delivered to the seller or a qualified intermediary.
• The exchange must be completed no later than 180 days after the sale of Property A or within 180 of the due date to file your taxes (with extensions), whichever comes first.

Like Kind

The “like kind” requirement can be a treatise by itself if you are considering exchanges of personal property. Luckily, this article is limited to real property, which is much simpler. Most real estate will be like-kind to other real estate. Quality or grade do not matter. So, for example, a residential rental house is like-kind even with a vacant lot.

One notable exception is you cannot replace US real property with foreign real property.

Receiving Cash

Be careful about taking control of the sale proceeds from the sale of Property A. That can make the entire transaction taxable even if you do go on to use the money to purchase Property B. You want the proceeds to be designated for reinvestment in Property B and not be available for any other purpose.  One way to avoid receipt of proceeds is to use a qualified intermediary to hold the proceeds until the exchange is complete.

Read Part II on 1031 Exchanges

~ Jeffrey Harrington, Esq.

Part I of this series was an overview of the whole “exchange” process. In Part II, the focus was on common pitfalls and the use of a Qualified Intermediary. Here we will review restrictions regarding the identity of the seller and purchaser.

Spoiler Alert: With very few exceptions, the identity of the seller of Property A and the purchaser of Property B has to be the same.

Naturally, there are many important aspects of a 1031 Exchange, all of which are deserving of attention. We are choosing, however, to focus on matching the seller and buyer because that issue is particularly relevant to investors.

It is very common for real estate investors to join forces with other parties in joint ventures. So, for example, Joe Investor has accrued some equity in his investment property—we will call it “Property A”—and he would like to use the money to purchase a more valuable property, which we will call “Property B.” However, Joe Investor either does not have enough cash to purchase Property B on his own, or would rather share the risk with someone else. Certainly, this is a very typical scenario.

Under normal circumstances, Joe Investor would go out and find a Jane Investor to go in with him on the purchase of Property B. Joe and Jane would likely form an LLC or a land trust to hold Property B, each having an ownership interest corresponding with the amount of his/her capital contribution. Here is the kicker.

If Joe Investor sells Property A, which was titled in his name, and buys Property B with a company or land trust, he destroys the 1031 Exchange and loses the ability to defer tax.

It does not matter that Joe used the money from Property A to buy Property B – even if he did properly use a qualified intermediary (as discussed in Part II). The tax payer that sells Property A has to be the same taxpayer that buys Property B. For investors, this is a rather unfortunate restriction and an important pitfall of which to be aware.

There is an exception, though it would not help Joe Investor in our example. If Joe held title to Property A as a single-member LLC—where Joe was the single member—then he would be allowed to discard the LLC and purchase Property B in his personal name without losing the tax deferral benefits. That exception does not provide Joe the ability to purchase Property B with a co-investor, though. To do that, we will need an additional step.

The tax code does not prohibit Joe Investor from selling Property A, purchasing Property B in his own name, and then transferring Property B to an LLC or trust, which is owned jointly with Jane Investor.

Now, if Joe and Jane do the exchange this way, Jane will be exposed until Property B is transferred to the LLC/trust.  Joe could double-cross Jane.¹

If Joe and Jane trust each other explicitly, that risk might be acceptable.

As an attorney, I never ceased to be amazed at how many of these deals go wrong. I probably have a skewed view of the business world because only the transactions that go wrong are brought to my office. Nonetheless, that is just not smart business.

The solution is for Joe and Jane to execute a joint venture agreement stipulating that, while Joe will be the titleholder, temporarily, Jane has an equitable interest in Property B.

Now, I know what you are thinking. What if both Joe and Jane want to use proceeds from the sale of their respective Property A-s to purchase Property B? Well . . . every problem has a solution. Call my office.

~ Jeff Harrington

I. Asset Protection

Let’s say you have the resources to buy a house but there is some reason you do not want your name on the title to the property.  Maybe there is a risk of creditors finding out and forcing the sale of the property to pay back a debt, or one of many other reasons for wanting to keep your involvement confidential.

When it comes to asset protection, there is a wide spectrum of techniques, ranging from the very simple to the very sophisticated.  Using someone else’s name is pretty much the bottom rung.

More on Asset Protection

Using the name of a family member or close friend is quick, easy and cheap.  There is no need to involve an attorney or set up any kind of entity (i.e. LLC or trust).  The allure is undeniable but . . .  there are some drawbacks.

 II. The Double-Cross

The obvious risk is the possibility that the person whose name you use will decide to keep the property.  If that happens, there probably will not be a whole lot you can do about it.  After all, for legal purposes, the property belongs to the person who is on title.

You will need to file a lawsuit and present all the evidence that you actually paid for the property and that, in equity, you are the real owner.  Maybe you can convince the judge . . . but, then again, the purchase could simply be seen as a “gift.”  How are you going to overcome that argument?

Believe it or not, my firm is dealing with a case right now where the mother is trying to double-cross her own son in just this way.

Let that sink in.

III. Spouses & Heirs of the Person on Title 

Naturally, you will carefully select the person whose name you are going to use, so maybe you think a double-cross is unlikely.  After all, this person is a loved one.

Your own mother is going to steal your house, right?  Okay, but what happens when your mother re-marries and your new step-father has ideas?

It actually is not all that common for clients to complain of the trusted person betraying them, even though fallings out are certainly a part of life.  It is much more common, however, to hear stories about problems with an in-law or the heirs of the trusted person.  After all, it is not up to you whom your relative marries, or when he/she might die.

When this situation comes up, there are at least two negative consequences.  First, your asset is exposed.  You could very easily lose it.

Second, your trusted person is caught between two opposing forces — both loved ones — just for doing you a favor.  

In that deal, all the people you care about lose.

IV. Creditors of the Person on Title 

Don’t forget that, while you might put the asset out of reach of your creditors, you are exposing the asset to the creditors of the person whose name you use — that includes past, present and future creditors.

Are you going to diligently monitor the trusted person’s debts on an ongoing basis?  Do you really know everything in that person’s past?  And, what about unexpected circumstances like an accident or bankruptcy filing?

The debt your house ends up paying for might not even be something voluntarily acquired.  For example, if your trusted person is at-fault in a car accident and there isn’t enough insurance to cover the damages, you can bet the injured party will be going after any and all assets your trusted person has.  At that point, it’s too late to transfer the property out of the trusted person’s name.  (You can try, but it probably won’t work).

And then there is bankruptcy.  Try explaining to a trustee that the home doesn’t really belong to the bankrupt debtor.  Good luck with that.

The trustee’s job is to marshall all assets available to pay creditors.  Even if the trustee is sympathetic — which she probably will not be — she has to do her job.  Expect no mercy.

V. Borrowed Credit

The other common reason a home might be titled in the name of someone other than the person paying is lack of good credit.  That might be a little more understandable . . . though still fraught with peril.

You probably have to come up with a sizable down-payment, so it’s not like you don’t have anything to lose.

Now, if the only way to get the property is with someone else’s credit, then my only suggestion would be to have your trusted person as a co-signer rather than the person on title.

Since the home is financed, then your exposure is limited to the equity in the property.  Now, with property values on the rise, that equity could be a large amount of money.  So, I’m not saying the risk is nominal, but at least you will not lose the entire investment.  I guess that is something . . .

You could build in some additional protection by including your name on the title and/or registering the property as a homestead.  And, you could have the trusted person name you as the beneficiary of the property in his/her will or trust.

VI.  Morale of the Story

These common practices are just not smart, folks.  There are better ways to accomplish your goals.  And, that is why God made attorneys.

When it comes to asset protection , setting up a trust is a much smarter way to maintain confidentiality.  You can easily avoid the pitfalls described above.  Yes, it will cost a little bit of money, and you will need an attorney, but we are talking about a significant investment here, right?

We hear sad stories in our office every day.  Would you rather pay your attorney a little bit at the outset or a lot later on when something goes wrong?

~ Jeff Harrington, Esq.

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