- Heller Real Estate Report - Volume 2, Issue 8
- December 11, 2009
- Law Firm: Richard M. Heller - Media Office
New Agreement of Sale reflects changes to inspections, mediation
Some major changes have been incorporated into a new PAR Standard Agreement for the Sale of Real Estate (ASR), which will be available later this year.
Last updated in 2005, the new Agreement of Sale includes:
- Expended and reorganized broker blocks which have been changed for clarity and ease of use
- Updated mortgage contingency paragraph to include an appraisal contingency clause
- Changed format for handling inspections to include more inspection contingencies and allow for a variety of circumstances
- Reduced default time for inspection to 10 days
- Change in language to dictate what will happen to escrow monies in response to the new Real Estate Licensing Registration Act (RELRA) changes
- Mandatory buyer/seller mediation as compared to the current agreement where the buyer/seller can waive mediation.
The revised form as recently approved by the PA Association of REALTORS®’s Standard Forms Oversight Committee and will require final changes prior to its publication.
As in the past, Guidelines for the Agreement of Sale, which explains how to use the ASR form, will be available when the form is published.
Amendments to Tax Reform Code Signed into Law
Changes to the Tax Reform Code (Act 48 of 2009) are a necessary component of this fiscal year’s overall budget plan.
Important changes to the Tax Code include the following:
- Accelerates due date for sales tax collections in 2010-2011
- Accelerates due date for personal income tax collections in 2009-2010
- Increases the net operating loss carry-forward to $3 million, or 15 percent, for tax year 2009, and $3 million, or 20 percent, for tax year 2010
- Changes CNI apportionment to 83 percent sales factor in tax year 2009, to be raised to 90 percent in tax year 2010
- Increases the fixed formula deduction from the value of capital stock in the calculation of the Capital Stock and Franchise Tax (CSFT) from $150,000 to $160,000
- Imposes a retroactive rate increase in the CSFT from 1.89 mills to 2.89 mills effective Jan. 1, 2009
- Reduces tax credit programs across the board by approximately one third
- Establishes a tax amnesty program that will run from April 26 through June 18, 2010
Fiscal Code Bill Signed into Law (Act 50 of 2009)
Changes to the Fiscal Code include the following:
- Allows the Department of Revenue to require electronic filing from individuals or entities preparing 50 or more returns per annum
- Relieves the Department of Treasury from having to publish unclaimed properties with values of less than $250
Limited Partnerships Provide "Flow Through" Tax Treatment
Through" Tax Treatment
Many businesses choose to create a limited partnership (LP) instead of incorporating for a variety of liability, tax and capital-formation reasons. This business form has become popular recently, but determining if an LP is the right model for your firm requires a clear grasp of the benefits and disadvantages.
Here's a list of the essentials to consider:
Ownership. An LP is generally defined as a partnership formed with one or more general partners and one or more limited partners under the Uniformed Limited Partnership Act.
Paperwork. Most jurisdictions require LPs to file a Certificate of Limited Partnership with the state you do business in. This sets out the partnership name, the business, the partners' names, addresses and capital contributions, and a plan for distributing the profits. In addition, a Limited Partnership Agreement is generally prepared, outlining the rights and duties of the partners. The agreement explains how the partnership will be governed, operated, and managed. For privacy reasons, most practitioners recommend that the agreement not be filed publicly with the certificate.
Liability. Limited partners in an LP aren't generally bound by the obligations of the partnership. A limited partner's liability is usually limited to his or her capital contribution.
However, this protection may be lost if the limited partner's surname improperly appears in the partnership's name or if the limited partner takes part in controlling the partnership. How is control determined? The courts look at whether a third party is injured in some way based on representations by limited partners who were purportedly acting on behalf of the partnership or otherwise representing themselves as able to exercise control.
Advantages. LP's may be the right form for your business because they:
- Provide a combination of limited liability based upon partnership tiers.
- Allow "flow through" tax treatment. So partnership income is taxed only once, when it flows through to the partners, rather than twice as with corporations that issue dividends.
- Let you sell interests for cash to investors who remain limited partners, allow you to retain management control.
- Have been successfully used for certain tax-motivated investment ventures like oil and gas drilling, real estate syndications, and motion picture productions.
As with any new business or change in entity, consult with your tax adviser to carefully weigh the benefits of each option. Depending on your needs and goals, an LP could provide the right model for your venture.
Capital Stock and Franchise Tax
Which was an 8.89 mill assessment in 2000 was considered among the state’s most harmful to competitiveness with other states, was scheduled to be eliminated this year. Those reductions had been slowed in previous budgets. A mill is equal to 0.001.
The budget raises the current rate of 1.89 mills to 2.89 mills through 2011, which will amount to a $ 374 million tax on businesses in this fiscal year and $ 551 million in 2010-11. The rate change, which is assessed on the value of a corporation’s stock, will be retroactive to January 1, 2009. The tax is now scheduled to drop back to 1.89 mills in 2012, to .89 mills in 2012 and then be eliminated in 2014.
RESPA Rules Still Unclear
Despite efforts to clarify the new rule under the Real Estate Settlement Procedures Act, some issues are still unresolved. But the issue of prepayment penalties on government-insured loans has been addressed.
On Oct. 7, the Department of Housing and Urban Development issued two more FAQs on the new RESPA rule to be implemented on Jan. 1, 2010. One FAQ is a revised version of a previously withdrawn FAQ regarding prepayment penalties. The other FAQ addresses a concern that the revised HUD-1 does not sufficiently provide for the tax deductibility of points.
Under the new RESPA rule, both the good faith estimate and HUD-1/1A provide for the disclosure of basic loan terms, including whether the loan has a prepayment penalty. The initial version of the FAQs issued on Aug. 13 addressed a feature of FHA loans under which it is common for the borrower to be required to pay interest through the end of the month when a prepayment in full occurs other than on the due date of a periodic payment.
To read the FAQ’s please click the link below.
Real Estate Cases of Interest
YOUNG’S SALE AND SERVICE v UNDERGROUND STORAGE TANK INDEMNIFICATION 978 A2d, 1051; (Pa Cmwlth, 2009) holds that the fee for protection from storage tank leaks must be made current before any leaks are discovered, that, where the property has been sold, and delinquency on the seller’s part must be made up, and that the fee applies to each tank, not each property.
PARKER OIL v MICO PETRO AND HEATING OIL; 979 A2d 854; (Pa Super. 2009) holds that piercing the corporate veil of an LLC requires proof of an illegal act by the LLC.
Zoning; Variance, RICHARDS v COUDERSPORT Z.H.B., 979A2d 957; (Pa Cmwlth 2009) reminds that to change a nonconforming use requires a variance and discusses the criteria.
PIETROPAOLO v Z.H.B. OF LOWER MERION TP; 979 A2d 969; (Pa Cmwlth, 2009) holds that a nonconforming use is one that was in effect when the zoning ordinance was enacted. A prior use as a storage garage does not permit use as a landscape contractor. Criteria for variance by estoppel were discussed.
Federal Taxes Affecting Real Estate
The following legislation was added by Public Law 111-5. This legislation included the following:
A 1-year extension of the additional 50-percent first year depreciation provision. The increased deduction is available for property acquired through calendar year 2009. See IRC § 168(k)(2).
An AMT patch that increases the exemption amounts for 2009. For 2009, the amounts are (1) $ 70,950 for married individuals filing joint return and surviving spouses; (2) $ 46,700 for other unmarried individuals; and (3) $ 35,475 for married individuals filing separate returns. See IRC § 55 (d).
A new provision under which taxpayers may elect to defer cancellation of indebtedness income arising from a reacquisition of certain debt instruments after December 31, 2008 and before January 1, 2011. Income that is deferred must be included in gross income ratably over five years beginning four (or five) years after the repurchase. See IRC § 108(i).
A tax court case of first impression holding that ownership interests in LLP’s and LLC’s are not limited partnership interests for purpose of IRC § 469(h)(2). This ruling allows those interests to avoid the statutory presumption that losses from those entities are passive. The case holds that LLP and LLC members are treated as general partners for purposes of IRC § 469(h)(2), and therefore are not subject to that provision.
Extended Tax Credit Signed Into Law
More people are now eligible to take advantage of the law, which includes a $ 6,500 tax credit for buyers who are current home owners and have lived in their home for five of the past eight years.
Income limits for eligible home buyers were also expanded to $ 125,000 for single buyers and
$ 225,000 for couples, up from $ 75,000 for individuals and $ 150,000 for couples. Qualifying home prices are capped at $ 800,000.
Fannie Mae Announces New Loss Mitigation Program for Investors
Owners of Second Homes. On October 20, 2009, Fannie Mae announced its Payment Reduction Plan (PRP) for homeowners who are unable to receive a mortgage loan modification under the Home Affordable Modification Program (HAMP). The PRP replaces and makes several adjustments to Fannie Mae’s HomeSaver Forbearance (HSF) program. Most notably, the PRP’s application includes non-owner occupied properties, such as investment properties and second homes. Further, under the PRP, the borrower’s monthly payment can only be reduced by up to 30%, while the HSF program permitted reductions up to 50%. The HSF program reductions included principal, interest, taxes, insurance and other escrow items, but under the PRP, the reduction only includes the “principal and interest” component of the payment. Effective November 1, 2009, the HSF program can no longer be offered to borrowers.
To find out whether your home loan is owned by Fannie Mae or Freddie Mac, try these Web sites:
Fannie Mae http://loanlookup.fanniemae.com/loanlookup/
Freddie Mac: http://www.freddiemac.com/mymortgage
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