Archives For Real Estate

In 2013 some wealthy earners will be subject to a new medicare tax (see Infographic); no, this isn’t the medicare payroll tax (although that too will also increase for some earners), rather it is an additional 3.8% tax applied to Net Investment Income for wealthy earners. To be subject, US earners must have an Adjusted Gross Income of $200,000 for individuals or $250,000 for couples filing jointly. Additionally, they must have some form of unearned income from investments in which they are passively involved, meaning they do not have material participation in the activity. This net investment Income can include earnings from property sales, rents, estates and trusts, annuities, stocks, bonds and more. With the changes, anyone who might be subject to the tax (which, by the way, is less than 4% of Americans), should seek a financial advisor immediately to plan for 2013 and beyond.

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Unearned Income Medicare Contribution

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JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.

An INTERESTing History

November 14, 2012 — Leave a comment

Interest Rates are at historically low levels.  In an effort to revitalize the housing market, the Federal Reserve has been using tools of monetary policy to keep costs low for would-be home buyers and help home owners whose interest rates shot-up in the wake of the 2007-09 financial crisis.  Why?  Because the housing market remains the biggest drag on the US economy – residential investment is 49% below what it would be normally, resulting in an estimated $370 billion loss in economic activity.  However, mortgage rates continue to drop in response to monetary policy actions such as QE3, which guaranteed the Fed’s purchase of $40 billion worth of mortgage backed securities/month indefinitely.  While rates may continue to decline, the process will be gradual; if banks slashed mortgage rates too fast, they would be unable to handle the demand from Americans seeking to buy or re-finance their home.  Still, today’s rates are unprecedentedly low, as shown by the infographic below:Note: As of 11/14/12, the average 30-year fixed mortgage rate was 3.41%.

JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.

On Dec. 31st, 2012 the Mortgage Forgiveness Debt Relief Act (MFDRA) will expire unless the lame-duck Congress renews it.  The act was signed into law five years ago, immediately after the housing bubble burst, in an effort to provide financial relief to impoverished homeowners by allowing them to short-sell their properties without having to pay taxes on the amount of forgiven debt.  For example, if you owe $400,000 on  your home and sell it for $300,000 you do not have to pay taxes on the $100,000 difference, which the IRS would traditionally count as income.  The IRS offers this provision for forgiven debt of up to $2 million from calendar years 2007 – 2012.  If the MFDRA is allowed to expire, any amount of forgiven debt on a short sale would be taxed again, placing a huge burden on the 24% of homeowners (11.3 M people) who are still underwater (owe more then their house is worth) and have a collective $692 billion in negative equity. It’s worth noting that young people are bearing the grunt of the burden; almost half of borrowers under age 40 are underwater.  Check out the breakdown from Zillow’s latest real estate report below:
The housing market has undoubtedly improved in the last half-decade, and all signs point to a continuance of that trend.  The  Fed recently announced a third round of quantitative easing, QE3,  where they will purchase $40 billion a month of mortgage backed securities for as many months as needed.  This action is intended to support the housing market and allow banks to cut interest rates modestly, which should allow more people to keep their home.  Moreover, Corelogic, an independent research firm, reports that home prices are rising in 19 to of 20 big cities and home prices increased by 5% on year over year basis in September, 2012 compared to September, 2011.  Still, the situation for those 11.3 million homeowners is unlikely to improve before the MFDRA expires.

It is still unclear whether or not an extension will be passed.  President Obama has publicly supported such a measure, but congress is not feeling very charitable right now (a 2-year extension would cost the treasury $2.7 billion) and an extension would have to be approved by both the House and Senate.  There has been bi-partisan support for an MFDRA renewal, but bringing it to the top of congress’ priorities is its biggest impediment.  This should be reason for underwater homeowners to worry, and may push them to sell their houses while they can still find some tax relief on a sale.  If an extension is not passed, they may have to wait a long time until the value of their property improves enough to account for the reinstated tax.  Of course, for most homeowners, the decision to move is not something that they can do anytime they like.  Even without the MFDRA, many homeowners find themselves stuck waiting for the value of their largest asset to improve to pre-crisis levels.
JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.

Although the Internal Revenue Service had to omit some major tax provisions from its inflation adjustment announcement last week, around two dozen items had their amounts bumped up for next year.

Here are some of the more widely used individual tax provision amounts that will change in 2013.

Kiddie tax: Although this moniker may sound like it’s a tax break for youngsters, sort of the child’s menu of the tax code if you will, the kiddie tax actually could cost you more.

Officially known as the Unearned Income of Minor Children Taxed as if Parent’s Income Tax, it requires, as per its name, that a child’s investment earnings exceeding a certain amount be taxed at their parents’ usually higher tax rate.

The kiddie tax was created in 1986 to prevent parents from putting money into investment accounts held in the names of their lower-taxed children.

Basically, a portion of the kids’ earnings remain tax free, with another chunk of investment income being taxed at the kiddies’ tax rate.

But when the earnings exceed the combination of the tax-free and low-tax amounts, then their parents’ tax rate kicks in. The earnings affected by the kiddie tax are reviewed each year for possible inflation bumps.

For 2013, parents will have to deal with the kiddie tax when a youngster’s investment earnings exceed $2,000. That’s $1,000 tax-free for your little angel and $1,000 at the youth’s tax rate. The 2013 amount is $50 more than the $950 allowed for both a child’s unearned income categories this year.

Gift tax exclusion: A simple way to reduce an estate’s taxable value is to give some of it away before you pass away.

Not only will this assist you in getting your estate below the taxable threshold, which is still up in the air for next year since the current estate tax law expires on Dec. 31 and Congress could make changes before or by (or even after) then, but this exclusion also allows you to receive the thanks of your grateful recipients. Double win!

In 2012 you can give up to $13,000 to as many separate individuals — and they don’t have to be your family (hint, hint) — as you want without any tax implications for you or the people to whom you give the money.

In 2013, you’ll be able to reduce your taxable estate by giving away $14,000 per person.

Deductible long-term care premiums: In 2013, you’ll need more medical expenses — 10 percent of your adjusted gross income instead of the current 7.5 percent — before you can claim them on Schedule A.

To help you reach the medical deductions threshold, you can include the deductible portion of eligible long-term-care insurance premiums. These amounts are based on your age and are adjusted annually for inflation. For 2013 they are:

Age Before the End of the Tax Year Limitation on Premiums
40 or younger $360
Older than 40 but not more than 50 $680
Older than 50 but not more than 60 $1,360
Older than 60 but not more than 70 $3,640
Older than 70 $4,550

Foreign tax provisions: Several inflation-affected tax areas involve foreign considerations. They include:

  • The amount of foreign earned income that taxpayers working abroad can exclude increases from $95,100 in 2012 to $97,600 in 2013.
  • The first $143,000 of gifts in 2013 to a spouse who is not a U.S. citizen will not be included in taxable gifts. That’s $4,000 more than allowed this year.
  • A U.S. person receiving aggregate foreign gifts exceeding $15,102 in 2013 will be required to file an information return. That’s $379 than in 2012.

Tax expatriates also will see some inflation adjustments in 2013.

An individual next year is treated as leaving the United States primarily to avoid tax if his or her “average annual net income tax” is more than $155,000 for the five taxable years ending before the date that person gives up U.S. citizenship.

Expatriates also face an exit tax when they give up their citizenship. In 2012, that tax can be avoided if the person’s deemed sale asset value is less than $651,000. In 2013, that value to avoid the expatriation tax goes to $668,000.

You can check out the other tax laws with 2013 inflation adjustments in Rev. Proc. 2012-41. And stay tuned for the IRS’ final word on the areas where it’s waiting for Congressional action.

JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.

Countdown to Closing

January 27, 2012 — Leave a comment


In our tax practice we are frequently called on to opine on real estate transactions. Recently we came across this Due Diligence Checklist, which is utilized in conducting a closing on a real estate acquisition. Clients, who routinely ask what happens before closing…. Here is your answer….

1. Verify Address and Legal Description of Property.

2. Determine if acquisition is fee, leasehold estate or both.

a. If leasehold estate review carefully to cover assignability, mortgageability, non-disturbance for leasehold mortgage and estoppels. If the lessor has mortgaged the fee, a non-disturbance from the fee mortgage is required.

b. Determine if improvements are owned by lessee (typically in a ground lease situation); in that case a deed of improvements and waivers from lessor and/or fee mortgagee is required respecting improvements, fixtures and equipment.

3. List and copies of recorded and unrecorded operating agreements, equipment leases, construction contracts, options to purchase, subleases, license and concession agreements, franchise agreements, labor agreements, and any other agreements.

a. Review; check for assignability, for unusual provisions, and for situations in addition to default which would require an estoppel. If franchise agreement, check on any upgrade requirements for transfer.

4. Existing Financing.

a. Determine What will be paid off and what will remain.

b. Get copies of all Notes, Loan Agreements, Mortgages, UCC’s, etc

c. If debt is to be paid off:

(i) Check for repayment restrictions, advance or post notice requirements and prepayment penalties;

(ii) Review Document for other problems;

(iii) Coordinate with Lender;

(iv) Procure payoff letter and, at closing, cancelled Note, release of mortgage.

d. If not to be Paid off

(i) Determine if to be assumed or taken “subject to”;

(ii) Determine requirements of release of Seller and/or assumption by Purchaser;

(iii) Coordinate with Lender and Title Company forms and recording requirements;

(iv) Determine whether any notices required;

(v) Determine if any consents required;

(vi) Estoppel Certificate;

(vii) If Leaseholds are being acquired, see Paragraph 2 above.

5. Transfer Payment Requirements: Review statues any verify with Title Company, local counsel and recorders for fee transfers, leasehold transfers and mortgages:

a. State: Form and amounts.

b. City: Form and amounts

c. County: Form and amounts.

d. Other: Inquire of local counsel.

6. Confirm with Title Insurer, local counsel, am recorders:

a. Evidence of water bill or other utility payments required for recording.

b. Tax number required on deed.

c. Notarization format.

d. Form of deed.

e. Other.

7. Physical Condition.

a. Check Lender Requirements.

b. List and copies of building code, OSHA, etc. notices.

c. Inquire of ongoing work or disputes with contractors.

d. Get copies of engineering, etc reports; review for problems.

e. Inspections by engineer and/or architect.

8. Licenses, Permits and Certificates of Occupancy:

a. Verify number of units on Certificate of Occupancy with listing and walk through of the property.

b. Procure copies.

c. Confirm that what is supplied is all that is required, including:

(i) Certificate of Occupancy

(ii) Environmental

(iii) Elevators

(iv) Business

(v) Pool

d. Confirm with city that a transfer of property does not trigger a building inspection or require any new permits; if permits can or must be assigned, check as to the timing of applications therefore and what then happens.

9. Copies of Guaranties and Warranties; check for assignability; determine importance

10. Insurance

a. Determine if Purchaser will be assigned Seller’s Insurance policies or procure its own.

b. Confirm with client that it has reviewed Seller’s insurance or procured insurance satisfactory to it.

c. Note Lender insurance requirements – get Lender copy of the policy and certificate ahead of time. Most lenders want the “New York” or “standard” form endorsements for those items. Be alert for problems respecting blanket coverage, deductibles, basic coverage and amounts.

11. Environmental Matters

a. Find out who at Purchase is covering this.

b. Include in Inquiry:

(i) Notices, permits, reports, and correspondence to and from environmental regulatory authorities, including notices of violation.

(ii) Environmental consultant reports and correspondence.

(iii) Financial estimates and reserves for environmental liabilities.

(iv) List of site historically used and currently being used for waste disposal or recycling.

12. Corporate Due Diligence

a. Certificate of Incorporation and all amendments thereto (or comparable organization documents) – Purchaser and Seller.

b. By-laws (or comparable documents) – Purchaser and Seller.

c. Is Purchaser qualified to transact business in the state of property.

d. List of officers of Purchaser and Seller; certificates of incumbency. At closing, match these names and signatures to executed documents.

e. Minutes of meetings of board of directors and shareholders meetings pertaining to the purchase and sale, and Purchaser’s financing.

f. Seals.

g. Certificate of good standing.

13. Title Insurance Commitment and Policy.

a. Match legal to survey. If no survey, order Alta Survey.

b. Check name of insured.

c. Add easement parcels and other benefits to Schedule A.

d. Get copies of all documents identified – and of all documents identified within such documents; locate on survey; review for problems such as

(i) Zoning or PUD requirements

(ii) Building lines, easements, etc. violated by improvements.

(iii) Contingencies or requirements.

(iv) Consents required upon transfer of property.

e. Make sure taxes and tax parcel numbers are identified’ confirm current payment; confirm the tax bills cover only the subjected property; for prorations, note if the last ascertainable tax bill was on property which has since been improved.

f. Endorsements to title policies

(i) Zoning (3.0 or 3.1) – confirm use;

(ii) Extended coverage, including survey, mechanics, liens and rights of parties in possession;

(iii) Mineral and water rights;

(iv) Roads and highways limited to those shown on survey;

(v) Access – as shown on survey, abutting the public way;

(vi) Address and location; and the property shown on the survey is the property insured;

(vii) Tie-in;

(viii) For lender:

1. Usury

2. Comprehensive Endorsement No. 1;

3. Future Advances, revolving credit, variable rate;

4. Doing business;

5. Any others requested by Lender.

g. Check to see if the utility letters are required; if so, check timing and begin processing.

h. Check to see if fraudulent conveyance exception is present; make inquiry of Title Company

i. Check with Title Company to see that equipment leases and operating contracts do not have to be included in ALTA – they will want a list and perhaps copies.

j. Determine the amount and nature of ongoing work at the site; ask the Title Company whether it will require mechanics’ lien waivers, sworn statements, etc, for this work

k. Confirm a gap undertaking is acceptable; get form; limit to matters caused by our client; confirm that order side will also execute a cap.

l. Determine valuation of each property: taxes; appraisals; rents; allocation in purchase and sale contract.

m. Re insurance:

(i) Direct Access;

(ii) Check title insurers’ limits and financials.

n. Match exceptions in title commitment to those in purchase and sale contract.

14. Survey.

a. Have client (often, property manager) confirm that the property shown on survery is the subject property

b. Certification.

(i) Current;

(ii) To Purchaser, Lender and Title Insurer;

(iii) In form acceptable to Title Insurer for purposes of issuing extended coverage endorsement.

c. Locate all matters identified in title commitment and policy.

d. Locate all improvements, including

(i) Building;

(ii) Parking:

(iii) Driveway cuts to road.

e. Confirm that the survey shows property abuts public road at point of driveway entrance

f. Flood and wetlands certification.

g. Check for any violations or encroachments over building lines, easements.

15. Zoning.

a. Title endorsement.

b. Match actual use of property to title endorsement

c. Determine if 3.1 is required; if so, procure necessary plans, etc. and pass through Title Company.

d. Special concerns of client for development of the property.

e. Review architect’s site development plan/drawings for compliance with current zoning regulations. Opinion to client regarding steps that may be required for compliance or change in zoning.

16. Usury.

a. State law – check.

b. Local counsel opinion.

c. Title Endorsement.

17. Estoppel Certificates.

a. Ground lessor.

b. Lessees

c. Mortgagees.

d. Equipment lessors.

e. Operating agreement parties.

f. Contractors.

g. Others – check with lender

18. UCC Searches

19. Appraisals

20. State and local sales and other tax clearances. Verify tax amounts.

21. Utilities

a. Identify: Electricity, gas, phone, sewage, power, cable, others.

b. Deposits.

c. Requirements upon transfer.

d. Availability.

e. Sufficiency

22. Proratable Items:

a. Determine what they are and how they work:

(i) Taxes: See if assessment notices are out.

(ii) Utilities.

(iii) Contracts.

(iv) Lease rentals.

(v) Insurance premiums.

(vi) Mortgage indebtedness.

(vii) Deposits.

(viii) Supplies.

(ix) Guest ledger.

(x) Employees.

(xi) Other.

b. Review loan agreements for contrary provisions or escrows.

23. Lender requirements; get lender checklist.

24. Financial information, including balance sheets, income statesments, tax returns, and other financial statements.

25. Employee lists and information regarding salaries, wages, benefits, length of employment, etc.

26. Proceed to Settlement.