What is the Foreign Investment in Real Property Tax Act?

What is the Foreign Investment in Real Property Tax Act?

When you are buying real estate there are many different documents that need to be executed at closing. One of those documents is the FIRPTA Affidavit. Although this document is only executed by the Seller, it is still important that the Buyer understands the implications of FIRPTA in real estate transactions and the execution of the FIRPTA Affidavit.

FIRPTA is the abbreviation for the Foreign Investment in Real Property Tax Act and was created to ensure any foreign person or entity pays the necessary taxes when they sell property in the United States. This law was enacted because the U.S. Internal Revenue Service (IRS) was concerned that foreign persons would sell their real estate and then leave the country without paying the tax due on the sale. Therefore, the IRS determined the best solution was to have the Buyer be responsible for making sure the tax is collected. The reasoning for this is, the Buyer will still be in the country after the sale and they have an identifiable asset, the purchased property, that the IRS could attach a lien to if necessary.

Therefore, under FIRPTA, the Buyer of the real estate must either pay, or withhold as a tax, up to 15% of the total amount realized in the sale if the Seller is considered a foreign person. If it is determined that the Seller is a foreign person and the Buyer has not paid or withheld the tax amount, then the Buyer could be held liable by the IRS for the unpaid tax. Furthermore, if the Buyer has not paid the tax or withheld the appropriate amount, a tax lien could be placed on the property.

Considering the potential liability to the Buyer, it is important that the parties execute the appropriate documents at closing to comply with FIRPTA. If the Seller is a non-foreign person, then he or she will often execute the FIRPTA Affidavit at closing. This affidavit is a sworn statement by the Seller, under penalties of perjury, that states the Seller is a non-foreign person in accordance with FIRPTA. In the event the Seller is a foreign person, the Buyer will need to withhold the required amount in compliance with FIRPTA.

Although FIRPTA was enacted to prevent foreign Sellers from leaving the country without paying the taxes from the sale, it has resulted in an increase in potential liability for the Buyers of real estate from foreign Sellers. Therefore, it is beneficial for the Buyer to understand the implications of FIRPTA and seek the advice and assistance from a real estate attorney in real estate transactions that involve a foreign Seller.

If you have any questions on this act please contact one of our experienced real estate attorneys, they would be happy to assist you.

Joint Tenancy vs. Tenants in Common, What is the Difference?

Joint Tenancy vs. Tenants in Common, What is the Difference?

When buying real estate in Wisconsin, one of the items you will need to consider is how you would like to take title of the property. If you are buying the property as an individual, then this is usually not an issue; however, this item will play an important role if you buy the property with one or more co-owners. You will need to consider whether you will be joint tenants or tenants in common. Both ownership types have different aspects and characteristics, so it will be important to consider the facts and circumstances pertaining to your situation.

In the case of joint tenants, each will have an equal interest in the whole property for the duration of the joint tenancy period, regardless of different or unequal contributions at the start of the joint tenancy. Additionally, joint tenants have a right of survivorship, therefore, upon the death of one of the joint tenants, the survivor becomes the sole owner of the property.

In contrast, tenants in common each have an undivided interest in the whole property for the duration of the tenancy. Tenants in common do not need to have equal interests in the whole property. Therefore, if there is a difference in the contribution amounts, then you may take that into consideration to determine the ownership interest each tenant in common receives. Additionally, there is no right of survivorship for tenants in common. Therefore, upon the death of a tenant in common, their ownership interest will be passed to their heirs at law under Wisconsin law and/or pass via their instructions within their estate planning documents.

Because there are differences between these types of ownerships, it will be important to consider how you want to take title. You should determine if you want your ownership interests to be equal or unequal, considering any differences in the amounts contributed by each co-owner. You may also want to consider how you would want the title to pass upon the death of a co-owner. Do you want the survivor to become the sole owner or would you like your interest in the property to pass to your heirs?

Under Wisconsin Law, it is assumed that co-owners of a property own as tenants in common, unless the intention of creating a joint tenancy is expressed in the document of title, instrument of transfer or bill of sale. Furthermore, under Wisconsin law, it is assumed that tenants in common each own an equal undivided interest in the whole property, unless the intent to have different undivided ownership amounts is expressed in the document of title, instrument of transfer or bill of sale.

As a result of the differences between joint tenants and tenants in common, it may be helpful to seek the advice of a real estate attorney before purchasing the property. An attorney would be able to analyze your situation and your intentions for the property and advise you on the best manner to take title with a co-owner. Moreover, an attorney will be able to assist you in expressing the appropriate language on the document of title, instrument of transfer or bill of sale to honor your intentions and prevent future issues regarding the ownership of the property. If you have questions, do not hesitate to reach out to one of our real estate attorneys.


Will You Be My Guarantor?

Will You Be My Guarantor?

One of the questions you may be asked in your lifetime is to be a guarantor. This request may come from a family member or even a friend that needs someone to be a guarantor for a lease, loan, etc. Your first thought may be to agree right away to help that individual but, there are many things you should consider prior to becoming a guarantor.

It is important to understand that as a guarantor you are making yourself financially responsible for the obligations of the individual if they fail to perform. Often the Landlord or Lender requires a personal guarantor to provide an extra level of protection to ensure they are paid what they are owed. This likely means the individual does not meet their rental or loan criteria and is considered high risk. Therefore, the Lender or Landlord is looking to protect their interests by having a more qualified person guarantee to fulfill the financial obligations of the individual in the event they are unable to satisfy the prescribed conditions.

Since you are making the commitment to be financially responsible for the obligations of another, you should consider some of the following items prior to becoming a guarantor. To begin with, you should consider the individual’s financial situation. Are they reliable and dependable? Are they able to handle their own bills? These are questions you will want to consider, because depending on the individual’s financial situation, you may be putting yourself at a greater risk than you are aware of.

In relation to knowing the individual’s financial situation you should also take a second to consider your own financial situation. It is wise to consider whether you would be financially able to fulfill the obligations of the individual in the event they fail to perform. If you would not be able to handle the financial obligations of the individual, then you should not be their guarantor.

Additionally, you should be attentive to the underlying document that you are being asked to guarantee. If you are asked to be a guarantor on a lease, that is typically only a year-long commitment. However, if you are asked to guarantee on a car loan or mortgage, then you could be taking on this extra financial responsibility for seven, fifteen, or even thirty years. It is important to consider the underlying document for the guarantee so that you understand how long you are committing to taking on this additional financial responsibility. Moreover, you should consider how this extra financial responsibility may impact your own debt to income ratio and thus your own ability to get a loan or mortgage in the future.

Another item you should consider is what type of guarantee the Landlord or Lender is expecting you to provide. Is it a limited or unlimited guarantee? If it is limited, then there is usually a set amount that the Landlord or Lender will be able to collect from you as the guarantor. However, if it is an unlimited guarantee then they would be able to recover the entire amount from you as the guarantor. It is very important to understand the type of guarantee that you would be providing before you become a guarantor.

These are just a few items you should consider before becoming a guarantor. In light of the substantial financial responsibility of becoming a guarantor, it is advisable to seek the advice of a business law attorney before executing any type of personal guarantor. An attorney will be able to analyze your situation and the requirements of the personal guarantee, in order to advise you on the risks and best course of action with regards to becoming a personal guarantor.


What is a Title Commitment?

What is a Title Commitment?

In almost every real estate transaction title work will be ordered and a title commitment will be provided to the parties to review prior to closing. A title commitment is a document that provides information pertaining to the property that is subject to the transaction. It will list out the various requirements, exceptions, and details of the title policy that will be issued for the property after closing. Since the title commitment provides valuable information pertaining to the property that a buyer may not otherwise know, it is extremely important to carefully review the title commitment before closing.

There are three sections of a title commitment that should be carefully reviewed. The first section is Schedule A. In this section, you will see information such as the type and amount of the policy, the proposed insured, the interest that the policy will cover, the current owner of the property and the legal description of the property. When reviewing this section, you will want to make sure the current owner and the seller are the same person/entity, the correct property is described and the proposed insured is listed exactly how the buyer plans on taking title. If there are any discrepancies, you will want to have the title commitment revised prior to closing and the title policy being issued.

The next section in the title commitment will be Schedule B-I. This section lists out all the requirements that must be satisfied before the title company will issue the title policy. Typically, you will see requirements such as a warranty deed transferring the property to the buyer, satisfactions of previous mortgages, etc. Additionally, if either of the parties are entities, there will likely be a requirement of documentation authorizing the entity to perform this transaction. It is important you understand both your requirements, as well as the other party’s requirements, so that all requirements are met prior to closing so that the transaction can proceed smoothly.

The last section in the title commitment that you should review is Schedule B-II. This section lists out the exceptions to coverage provided by the title policy. There are two types of exceptions that will be listed in this section. The first type is the general exceptions. These exceptions are in every title commitment and can often be removed if certain actions are taken. The other type of exceptions are the specific exceptions. These are exceptions that are specifically connected to the property in the transaction. One example of a specific exception would be a prior mortgage on the property. Assuming the mortgage would be satisfied at closing, this exception would then be removed from the title commitment. Because these exceptions can cause a lack of coverage in the future if an issue arises, it is crucial that the buyer review each exception.

Taking into consideration the importance of the title commitment in the execution of a real estate transaction, it will be helpful to seek the advice of a real estate attorney prior to closing. A real estate attorney will be able to review each section of the title commitment and determine if there are any discrepancies or items that need to be revised. Moreover, an attorney will be able to analyze each exception to the title policy and advise you on the impact each exception has on the property. Overall, seeking the help of a real estate attorney to review the title commitment prior to closing can facilitate a smooth transaction and prevent future issues that may arise as a result of an overlooked item on the title commitment.


Transfer on Death Deeds

Transfer on Death Deeds

As you begin to think about the best structure for your estate plan, you are likely guided by one thought, which is how do I avoid probate? The consensus about probate is that it can be costly and time consuming. For that reason, many people structure their estate plan with the hope that probate can be avoided. One way to do this is to create a trust and place your assets, that would typically need to go through probate, into the trust. However, sometimes the cost of implementing a trust can be impractical for the size of your estate. Therefore, another solution for some estates is to utilize a transfer on death deed to avoid probate.

A transfer on death deed is a document that is recorded with the register of deeds in the county where the property is located and designates a beneficiary to take title to the property upon the death of the sole owner or the last to die of multiple owners. This document can be cancelled or changed at any time by the owners of the property simply by executing and recording another deed that designates a different beneficiary or no beneficiary. Moreover, the owner of the property does not need any consent or permission by the beneficiary in order to make these types of changes.

The clear advantage to using a transfer on death deed is that it will bypass probate and as a matter of law the property will pass to the designated beneficiary. Furthermore, there is the added benefit that the owner of the property maintains full and complete control in their interest in the property during their lifetime. This document does not grant any type of current interest in the property to the beneficiary. It is only upon the death of the owner(s) that the beneficiary obtains the interest in the property. Therefore, it allows for the owner of the property to continue to use their property as they see fit, with the benefit that upon their death the property shall avoid probate and pass directly to the beneficiary.

Despite the advantages to the transfer on death deed, there are still some disadvantages to executing this type of document. For example, the transfer on death deed must be publicly recorded in order to be effective. Therefore, the identity of the beneficiaries will be available in the public record during the property owner’s lifetime. This can be problematic if the beneficiary is not a family member or if there is tension among the beneficiaries of the owner’s estate. Depending on the individual and their circumstances, it may be preferable to keep this type of information private and thus utilize a different strategy to avoid probate.

In light of the possible advantages and disadvantages, it will be important to seek the advice of an estate planning attorney before executing a transfer on death deed. An estate planning attorney will be able to analyze your situation and advise you on the best course of action to take in structuring your estate plan to avoid probate, which may include executing a transfer on death deed.


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