Saturday, October 17th, 2009
A Short Summary of Florida Mechanics’ Lien Law
In order to have a valid lien a subcontractor or materialman must following these rules:
1. He must send a notice to owner to the owner listed on the notice of commencement within 45 days up his first provision in of services or materials to the site.
2. He must then file a mechanic’s lien in the Public Records within 90 days of his last provision of services or materials to the site.
An owner, in order to be protected against mechanic’s liens and preserve the contract price agreed to with the general contractor, must do the following:
1. The owner must record a notice of commencement in the public records and post a certified copy on the job site so that the names and addresses of the owner, lender and contractor are available to the subcontractor.
2. The owner must pay each subcontractor and materialman who sends a notice to owner directly to see that the subcontractor or materialman gets paid from the funds he would otherwise pay to the contractor. To the extent that he fails to do so, the payment to the contractor is not a proper payment and the contract price protected by the mechanic’s lien law is increased to the extent of those improper payments.
The construction lender must see that the owner meets his requirements and to the extent that the lender distributes draws to the general contractor without complying with 1 and 2 will, the lender can be liable to the owner. The statute doesn’t specifically deal with exculpatory agreements and advance owner authorizations.
If the subcontractor or materialman fails to comply with the statute, then he has no remedy against the owner and must seek to collect for his work under his contract with the general contractor. If he promptly complies with the requirements for a lien then he will likely collect from the draws and if he is not paid he has the right to file a lien, foreclose against the owner, and sell the property on the courthouse steps to collect his lien. The foreclosure should not affect the lender because the mortgage should be and almost always is recorded before the Notice of Commencement. All mechanic’s liens attaching while an NOC is in effect take priority at the time of filing of the NOC. However the lender can be liable to the owner for distributing construction funds that are not proper payments.
If a subcontractor or material man has attempted to assert a lien that the owner or lender believes to be invalid, there are three remedies:
1. A bond can be posted of 125% of the claimed lien amount with the clerk of Circuit Court and the lien will be transferred to that security. The property is then free of the lien and the lienor can proceed against the bond and the general contractor. It’s not clear to me whether after a bond is filed the lienor can name the owner as a defendant and attempt to collect attorney’s fees in excess of the 125%.
2. The owner can file a notice of contest of the lien and server copy on the lien or and the lien nor must file suit within 60 days or the lien expires. Of course, if the lienor does file suit against the owner to enforce the lien then the prevailing party is entitled to collect attorney’s fees from the other party and often the attorney’s fees are more substantial than the lien amount claimed.
3. The owner can simply do nothing and wait to to see if the lienor files a suit or not. If no suit is filed within 12 months of the filing of the claim of lien, then the lien expires automatically.
The contractor must also file his lien within 90 days of his last services to the job. Therefore if he abandons the job for more than 90 days or is given a notice of default after he has provided no services or materials for 90 days, he has probably lost his ability to file a valid mechanic’s lien unless he perjures himself in a claim of lien. The contractor can still sue for money claimed to be owed, but he would not have a lien on the property to hold up disbursements from the lender and wouldn’t have the right to attorneys’ fees unless they are provided for in the contract.
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Saturday, October 17th, 2009
New Construction as Replacement Property
Can new construction be counted toward the replacement property in a tax deferred Section 1031 exchange? The answer is no!
But real property with newly constructed “built to suit” buildings or other improvements in place can be if the exchange and the construction are properly arranged and the improved property deeded to the exchangor within the time limits for a 1031 exchange.
Question: I want to exchange my existing rental property in New York for a rental property in Florida, but I can’t find a suitable property to acquire. I found a builder who can build what I want and a site that I can acquire. Can I build on the lot to complete an exchange?
Answer: No, you can’t! But if a qualified intermediary acts for you in your 1031 exchange it can take the proceeds from its disposition of your old property and use a single purpose Florida limited liability company to contract with the contractor to build the designated improvements, hold title while the construction is permitted and completed, and then deed the then improved real property to you to complete the 1031 exchange.
Rules to Apply
1. If you exchanged away real property only real property qualifies as like kind property. A contract to build, an intention to build, even a prepayment of cash to the contractor to build does not qualify as like kind property. The improvements constructed on the land at the time it is deeded to you do qualify as real property and like kind.
2. If you receive title to the land before the improvements are in place, only the value of the land is like kind replacement property.
3. The title must be deeded to you with the new construction on it within 180 days after closing the property exchanged away in order to apply any amount as replacement property. Nothing constructed on the property after the deeding to you qualifies as replacement property.
4. To defer all accrued gain on the property exchanged away, the value of the replacement property must equal or exceed the sale price of the relinquished property and all the cash proceeds must be placed into the replacement property.
There are problems:
a.) I have cash but it takes more than 180 days to obtain approvals and permits and build the improvements. Structure the disposition of your old property for a delayed closing. The 180 days is not flexible.
b.) I have a mortgage on my New York property. The sale won’t provide enough proceeds to fund acquisition of the land and construction of the improvements. You can’t mortgage property you don’t own and you cannot own the replacement property while the construction is being done and count the value of the construction as replacement property. Call your tax attorney.
Saturday, October 17th, 2009
SAMPLE DEFERRED EXCHANGE: STEP BY STEP
1. Exchangor enters into contract to sell old property to Buyer.
2. Exchangor enters into exchange agreement with Intermediary.
3. Intermediary agrees to take old property and sell it to acquire funds to buy new property for Exchangor.
4. Exchangor assigns to Intermediary his rights to sell old property and all his other rights under contract.
5. Exchangor gives notice of the assignment to Buyer of old property.
6. Intermediary instructs closing agent and Buyer that Exchangor will deed directly to Buyer in order to avoid duplication of documentary stamps. Intermediary executes closing statement showing proceeds to Intermediary and Intermediary receives all the net proceeds. Intermediary, as required by the exchange agreement, allows Seller no possession or control over the proceeds.
7. Exchangor locates up to 3 potential replacement properties and designates them as potential acquisitions to complete his exchange in a signed writing delivered to Intermediary within 45 days of the closing of the sale of the old property. If the Exchangor is to defer all capital gain, Intermediary must use all the cash proceeds from the relinquished property to buy replacement properties with an aggregate purchase price at least equal to the selling price of the relinquished property .
8. Exchangor signs a contract to purchase the new property and places a deposit on the contract.
9. Exchangor assigns the contract to purchase the new property and the rights in the deposit to Intermediary. Intermediary can reimburse the deposit to Exchangor upon assignment.
10. Exchangor gives notice of the assignment to the Seller of the new property.
11. Intermediary instructs Seller and closing agent that, although Intermediary is the buyer of the new property, Intermediary has agreed to acquire the property to complete an exchange for Exchangor, so have the deed pass title directly into Exchangor in order to avoid duplication of documentary stamps.
12. Intermediary closes the contract to purchase by delivering the proceeds from his sale of the old property directly to the closing agent for the new property in exchange for the deed into Exchangor. Title must pass into Exchangor within 180 days of the closing of the sale of the old property. Intermediary signs the closing statement for the new property as buyer. Any additional funds necessary to close the purchase of the new property can come from the Exchangor.
This is a sample of one pattern of deferred exchange used by some attorneys. This pattern is shown for general information and discussion purposes only. Details have been omitted in order to demonstrate the pattern. No one should attempt to structure or document a tax deferred exchange without the guidance of a tax attorney. See Section 1031 Exchanges.
Examples of complicating factors:
Mortgage financing of the new property for additional funds to acquire the new property. Refusals and inadvertent failures of other parties to the transactions to cooperate. Construction on the new property not completed within the 180 days. Changes in the intended use after acquisition of the new property. Substantial personal use of the old property. Personal property included in the sale. Contracting to purchase the new property before a buyer is found for the old property.
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Saturday, October 17th, 2009
Every Florida resident is entitled to have his interest in the real property on which he resides (his “homestead”) exempt from forced sale for collection of money judgments. After the owner’s death, this exemption inures to his surviving spouse and/or heirs at law who inherit the homestead.
In addition, an attempt by a deceased owner to devise his homestead property by will is void if he is survived by either a surviving spouse or a minor child. (Exception: A devise of the fee simple title to the surviving spouse is valid if there is no child that is a minor.)
Florida homestead law complicates real estate titles and conveyances, the descent and distribution of decedents’ estates, and the collection of money judgments. In addition, it is often confused with the homestead exemption from real property taxes.
Any attempt by a living homestead owner who is married to deed or to mortgage the homestead without the joinder of his spouse is void. A money judgment against the owner of a homestead cannot be a lien on the homestead. To have marketable title to the property free of the lien of a properly recorded money judgment, however, an owner must establish the property’s homestead status judicially.
If not validly devised by will, the homestead passes upon the death of its owner outside the powers of the personal representative in the probate proceeding directly to the surviving spouse, if any, for life with a vested remainder to the decedent’s lineal descendants per stirpes. If there is no surviving spouse and the homestead is not validly devised, the title passes by normal Florida intestacy to the heirs at law but outside the powers of the personal representative to sell. If there is no lineal descendant surviving, the title passes to the surviving spouse under intestacy rules.
Homestead property can be validly devised by will only if the decent had neither a spouse nor a minor child at the time of his death.
If the homestead is validly devised to someone who is not a relative within the class of potential heirs at law (in other words, not one that could have inherited the devised interest by intestacy if all older generation heirs at law had predeceased) then the property loses its homestead status upon the death of the decedent and therefore is an asset in the probate estate subject to possible sale to pay the costs of administration and creditors’ claims.
If the interest was validly devised to a relative who was potentially an heir at law of the decedent, then the homestead passes directly to that devisee without being subject to the power of the personal representative to sell it to pay claims or costs of administration.
Of course, the probate estate is the proceeding in which the homestead or non-homestead status of the interest is determined. An order determining the homestead status in the probate estate, entered at a hearing after notice to all creditors and other interested persons, may be necessary to establish the exemption from claims of the decedent’s creditors. See Probate.
The homestead property tax exemption has a separate statutory basis. It allows a resident of Florida to exclude from the calculation of his ad valorem real property taxes $25,000 of the assessed value of his principal residence.
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Friday, October 16th, 2009
Deferring Capital Gains taxation through a Like Kind Exchange
Section 1031 of the Internal Revenue Code allows the owner (called the taxpayer here) of appreciated real property used in a trade or business (such as rental) or held for investment to be exchanged for like kind property without payment of capital gains taxes.
Like kind property is other real property the taxpayer intends to hold for investment or use in a trade or business.
However, in order for the exchange to avoid recognition of all capital gains taxes:
a) the taxpayer must not assume a mortgage on the new property unless it is a mortgage smaller than one assumed from him on his former property;
b) the taxpayer must not receive any cash or non-like-kind property in the transaction;
c) if the transaction is a deferred transaction, then the acquisition cost of the new property must exceed the price paid for the former property.
The taxpayer never will find another person with property the taxpayer wants who wants the taxpayer’s property. Instead, the taxpayer must establish an exchange by linking together a Buyer who wants the taxpayer’s property to a seller who has property the taxpayer wants. This is referred to as a deferred exchange.
IRS regulations allow a taxpayer who has a contract to sell his property to assign the contract and the property to a qualified intermediary for the purpose of completing a Section 1031 deferred exchange. This must be done pursuant to an exchange agreement with the qualified intermediary clearly setting forth the duties of both parties to meet the requirements of the regulations.
When the taxpayer finds property that he wishes to acquire to complete the exchange, the intermediary can acquire that property using the proceeds from the intermediary’s sale of the taxpayer’s former property.
The most important rules governing the procedures, stated generally, are:
a) the qualifiied intermediary must be unrelated, independent, trustworthy and must be required by the exchange agreement to hold the funds separate from the taxpayer while an exchange is pending;
b) the taxpayer must unambiguously designate potential replacement properties (3 or less) within 45 days of the closing of the the sale of his former property;
c) the taxpayer must acquire title to the new property within 180 days of the closing of the sale of his former property; and
d) the taxpayer must not have ever had the ability receive the proceeds from the sale of his former property.
IRS rulings have allowed the intermediary to “acquire” the taxpayer’s former property by simply assigning the contract or property to the intermediary pursuant to the exchange agreement. Then the intermediary instructs the taxpayer to deed directly to the buyer to complete the intermediary’s obligation to deliver title to the property in exchange for intermediary receiving the proceeds from the transaction. The purpose is to avoid the expense of additional documentary stamps which would be required to be placed on a deed to the intermediary. Such stamps must still be placed on the deed to the buyer, but duplication of the expense is avoided.
In a similar fashion, the intermediary can “acquire” the new property to convey to the taxpayer to complete the exchange. The intermediary delivers the proceeds to close the transaction and simply instructs the Seller to deed the property directly to the taxpayer in order to avoid duplication of the documentary stamps.
IRS rules allow the taxpayer to later receive the benefit from earnings on the proceeds held by the intermediary pending completion of the exchange.
From the generosity of the IRS in these procedures, one can readily see that the most important rule (but only one of many) for avoiding the capital gain taxation of the series of transactions constituting the exchange is that the taxpayer must never have the legal ability to obtain the proceeds.
This explanation has been made simple and general in order to communicate the basic structure of like-kind exchanges.
Every exchange must follow detailed rules and document full compliance. One should not rely on those who use forms without the active participation of an experienced attorney. Experience has shown that the variables in facts and unanticipated misunderstandings and failures of non-exchanging parties to follow instructions can result in complications in even well-planned exchanges.
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Friday, October 16th, 2009
Florida residents planning for death have often transferred their property into revocable trusts. Revocable trusts can be used in Florida to avoid the necessity for a routine probate proceeding to establish ownership of a person’s property after his death.
This is accomplished by transferring the ownership of the property to a trustee while the settlor or grantor, the person transferring property into trust, is alive. That is why such a trust is often called a living trust or inter vivos trust . After the death of the settlor, the trustee can transfer title to the decedent’s property without the necessity of a probate proceeding.
Usually the settlor will name himself as trustee of his revocable trust and convey his property to himself as trustee. Florida law recognizes that the successor trustee, after the death of the settlor of a revocable trust, has the power, if given in the trust agreement, to transfer title to property held in trust to a beneficiary of the trust pursuant to instructions in the trust agreement or to a purchaser from the trustee
Property is held in trust only if it has been properly conveyed to the trustee by appropriate deed, probate proceedings or other legally recognized conveyance. Execution of the trust agreement does not place any property into trust. Any trust which has testamentary aspects and amendments must be executed with the formalities required for a valid will. Chapter 736 of Florida Statutes governs administration of trusts and the powers and liabilities of trustees. Conveyance of the settlor’s homestead property to the trustee of a revocable trust does not change its homestead status. See Homestead Law.
The revocable trust can be established and structured to provide for death planning with no administration during settlor’s life and only small inconveniences to maintain the trust structure. In addition, the trust structure can be very useful in the event of the settlor’s disability and can allow avoidance of an incompetency hearing and guardianship if the grantor becomes incompetent.
The settlor can provide for complex distribution schemes with a revocable trust or a testamentary trust (a trust established in the decedent’s will). Only a trustee can efficiently administer complex provisions such as deriving income from trust assets and distributing it, or a portion of it, to the surviving spouse or another person for life and then distributing the ownership of the remainder after the surviving spouse’s death to other beneficiaries. A trust, whether revocable or testamentary, does not save estate or gift taxes. It is, however, a useful tool for structuring an estate plan to save estate taxes and to hold and distribute the settlor’s property to achieve his goals after death.
The U.S. Internal Revenue Code ignores a revocable trust while the settlor is alive and taxes the settlor for trust income as if the trust did not exist. For unified transfer tax (gift tax and estate tax) purposes, the Code also deems that no completed gift has occurred. That tax treatment facilitates use of a revocable trust for estate planning since no separate income tax return is required and unified transfer taxes are not imposed while the trust is revocable and the Settlor is alive.
However, the trustee remains liable to the extent of the trust property at the time of settlor’s death for claims of creditors, costs of administration in probate, and estate and income taxes to the extent that there is no probate estate or it does not pay them.
All creditors’ claims against decedent are barred two years after decedent’s death unless a probate estate has been opened. Creditor’s claims can be determined only in a probate proceeding. See Probate.
All professional trustees require that a probate proceeding be done so that the claims and taxes can be determined and disposed of within a short period of time and then the property can be sold or distributed to the beneficiaries safely.
Since trust administration under the supervision of the probate court is not automatically required in order to pass title to the beneficiaries, a revocable trust can reduce probate expenses in simple uncontested distributions of the deceased settlor’s property.
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Friday, October 2nd, 2009
Probate is the name of the legal procedures that determine the successors in ownership of money or property owned by a deceased person in his own name at the time he died. Florida probate determines ownership only of Florida real property owned by any decedent and tangible and intangible personal property owned by a decedent who was domiciled in Florida at the time of his death.
The personal representative for the decedent’s estate is appointed by the Circuit Court after petition and notice to any other persons entitled to preference. The person named in the decedent’s will is entitled to be appointed if qualified. If the decedent had no will or if the will did not appoint a qualified person, Florida Statutes set up the order of preference for appointment among relatives to be personal representative.
The decedent’s property must be gathered by the personal representative and sold to the extent necessary to pay creditors’ claims, any estate taxes, and the costs of administration. The creditors must file their claims within three months of publication of the notice of administration or, if the personal representative had knowledge of the debt, within 30 days after service of the notice of administration, if that period ends after expiration of the claim period. The creditors’ claims which must be paid are those allowed by the personal representative and those which are objected to by the personal representative, but proved in court. Those claims must be paid to the extent that the probate estate has assets to do so after payment of the costs of administration.
The personal representative has no power to sell homestead property of the decedent to pay claims or costs of administration unless the homestead has been validly devised to persons who are not within the class of potential heirs at law of the decedent. See Homestead Law.
Persons named in the decedent’s will to receive specific bequests are entitled to receive them if such property need not be used to pay those obligations.
Any money and property remaining after satisfaction of taxes, costs of administration, creditors’ claims, and specific bequests must be distributed to the residuary beneficiaries named in the will or, if no will, to the intestate heirs named in the Florida Statutes.
The types of proceedings, in order of simplicity, are:
a) Proceeding for an order establishing a non-Florida probate as a muniment of title for real property where a probate was completed in another state and the decedent who was domiciled there has been dead for more than two years;
b) Summary Administration where the decedent has been dead for two years (and the debts therefore barred) and all beneficiaries join in the petition and agree as to distribution;
c) Summary administration where there are no unpaid debts, all beneficiaries join in the petition and agree as to distribution, and the property subject to Florida probate has a value of less than $75,000;
d) Family Administration where the Gross Estate of the decedent (not just the property in the probate estate) has a value less than $60,000 and the only beneficiaries are the spouse, lineal descendant or lineal ascendants of a Florida domiciled decedent;
e) Formal Probate, which applies in all other situations, including notice to creditors and the determination of the debts of the deceased settlor and the costs of administration. Claims are enforceable against the assets of the settlor’s revocable trust. See Trusts.