When real estate is sold in California, the state requires that income tax for that sale must be withheld.  In this post we will discuss sellers who are individuals or who may qualify as an individual.  We will also explain qualified exceptions and exemptions to withholding.

What is the 593-C Form?
The seller will need to fill out the State of California Real Estate Withholding Certificate, form number 593-C.  The escrow company will provide this form to the seller, typically when the escrow instructions have been prepared and sent out for signatures.

Completing the 593-C Form

The standard amount of taxes to withhold is equal to 3 1/3% of the total sales price.  (Note: If the seller is claiming an exemption by filling out the 593-E form, the percentages will be different on if it is reduced withholding.  Those percentages are reflected on the form itself.)

If the seller is an individual, enter the social security number (SSN) or individual taxpayer identification number (ITIN) as indicated on the 593-C form.  If the sellers are spouses/registered domestic partners (RDPs) and plan to file a joint return, enter the name and SSN or ITIN for the spouse/RDP on the 593-C form in the space provided.  If there is more than one seller and the sellers are not married/RDPs, then each seller must complete their own 593-C form.

Entities That May Be Considered “Individuals” by the Franchise Tax Board

Single Member LLC:
If the seller is a single member disregarded LLC, enter the name and the tax identification number of the single member.

Grantor Trust:
A grantor trust is created when the trust is formed by the grantor(s) and the grantor(s) are also the trustee(s) of the trust.  A good example of a grantor’s trust is a Family Trust.  The grantor trust is disregarded for tax purposes and the individual seller must report the sale and claim the withholding on his/her/their individual tax returns.  If the trust was a grantor trust that became irrevocable upon the grantor’s death, enter the name of the trust and the trust’s federal employer identification number (FEIN) on Form 593-C.  Do not enter the decedent’s name or trustee’s name or SSN.

Exceptions to Withholding
Certain real estate transactions are exceptions to state income tax withholding.  The exceptions are: 

1. the total sales price is $100,000.00 or less;
2. the property is being foreclosed upon pursuant to a power of sale under a deed of trust, or sold by a deed in lieu of foreclosure;
3. the transferor is a bank acting as a trustee other than a trustee of a deed of trust;
4. the seller certifies to an exemption.

Exemptions to Withholding
There are several exemptions.  The most common exemption is the seller’s principal residence as set forth under Internal Revenue Code (IRC) Section 121.  Generally speaking, the seller must have owned and lived in the property as their main home for at least two years during the five-year period ending on the sale of sale.  Another exemption would be a loss or zero gain.  Claiming this exemption will require form number 593-E to be filled out and signed by the seller. 

If any of the first three exceptions are applicable, the seller checks the appropriate exception on the 593-C form and signs the form.  If the seller checks number 4 on the 593-C form, claiming an exemption, there is an additional form which will need to be filled out. 

The California Franchise Tax Board website has provided more information with a complete list of exemptions, as well as forms 593-C and 593-E.

It is always important for the seller to check with their tax advisor when filling out the 593-C and it is even more important if the seller is filling out a 593-E exemption form.

Senate Bill 931, providing California Short Sale Deficiency Protection, will go into effect on January 1, 2011.  This new law states that existing lenders of record who have approved and agreed upon a short sale will not be able to obtain a deficiency judgment against the seller after the short sale is completed.   After providing written consent to a short sale on a first mortgage or first deed of trust, the lender must accept the proceeds of the sale as full payment and must fully dismiss the remaining balance due on the loan.   This law applies only to first mortgage loans secured by one to four residential units.  However, this law would not apply if the lender is seeking damages for fraud or waste by the borrower.

Section 580e of the bill reads:

(a) No judgment shall be rendered for any deficiency under a note secured by a first deed of trust or first mortgage for a dwelling of not more than four units, in any case in which the trustor or mortgagor sells the dwelling for less than the remaining amount of the indebtedness due at the time of sale with the written consent of the holder of the first deed of trust or first mortgage. Written consent of the holder of the first deed of trust or first mortgage to that sale shall obligate that holder to accept the sale proceeds as full payment and to fully discharge the remaining amount of the indebtedness on the first deed of trust or first mortgage.

(b) If the trustor or mortgagor commits either fraud with respect to the sale of, or waste with respect to, the real property that secures the first deed of trust or first mortgage, this section shall not limit the ability of the holder of the first deed of trust or first mortgage to seek damages and use existing rights and remedies against the trustor or mortgagor or any third party for fraud or waste.

(c) This section shall not apply if the trustor or mortgagor is a corporation or political subdivision of the state.

 The information in this blog is provided for informational purposes only. We recommend anyone going through a short sale or foreclosure to consult a licensed real estate attorney for advice.

During this time of Thanksgiving, all of us at Coachella Valley Escrow would like to express our sincere appreciation for our readers!  Thank you for taking the time to read our blog and the wonderful feedback you provide.  From our family to yours, we wish you a very warm and happy Thanksgiving!

Most often, when a property sells, the transaction is negotiated and the purchase agreement is put together by the real estate agents representing the buyer and seller.  The real estate agents also act as the primary point of contact with escrow during the escrow process.  In contrast, a “for sale by owner” escrow does NOT have a real estate agent representing the buyer or seller.  As a result, the buyer and seller become the primary points of contact in the transaction and are responsible for providing to escrow all the parts and pieces needed for the escrow process to happen.  This post is intended to help clarify the responsibilities of the buyer and seller in escrow for sale by owner transaction.

To open escrow, escrow will need to receive the “terms of the sale” direct from the buyer and seller before escrow instructions can be prepared for signing.   Escrow does not negotiate terms between the Buyer and Seller or give legal advice, therefore, it is suggested the buyer and seller meet (prior to making an appointment to open escrow) and discuss the terms and write up their “Agreement”, spelling out what has been agreed to, including the sales price, closing date, who pays for what closing costs, etc.  By having this information in written format, any misunderstandings of what was verbally agreed to when they come into escrow will be avoided.  Escrow does not provide the “Agreement Form” but can refer them to (a) their attorney, (b) store that carry forms or (c) going online for possible Purchase of Real Estate Property forms that would be helpful to them.

What to Bring To Escrow in a For Sale By Owner Transaction:

• Copy of the written Agreement between the buyer and seller spelling out the terms
• Seller is to bring copy of their loan coupon for any loans to be paid off at closing
• Seller is to provide name of homeowners association &  management company (if applicable)
• Buyer to bring earnest money check payable to “escrow”, which will be deposited into Escrow Company Trust Account

Buyer’s Actions involving New Lender Requirements:

• Buyer gives a  check to the new lender covering credit report and appraisal costs
• New lender will require substantial documentation from the buyer in order to give loan approval.  Since what will be required may vary among lenders, the buyer will work directly with the lender as to the documentation the new lender requires

Seller’s Action involving New Lender Requirements:

• Seller needs to be available for appraiser to have access to property in order to complete the appraisal required by the new lender

Escrow Company’s initial contact with New Lender:

• Provides a certified copy of all written agreements and escrow instructions presented to the escrow officer by both buyer and seller
• Escrow Officer works closely with the new lender, supplying additional documents as required by lender including estimated closing statements

Options Available to the Buyer:

• Professional home inspection
• One year home warranty policy
• Termite Inspection

Seller is Responsible for Providing:

• Copy of Homeowners Association documents, if applicable  (escrow will order for seller through the management company)
• Provide Buyer with Seller Transfer Disclosure Statement if property is 1 to 4 single family  (forms can be ordered through a Natural Hazard Disclosure Company)
• Operable Smoke Detector (1 to 4 single family)
• Water heater needs to be strapped (1 to 4 single family)
• Grant Deed (will be provided by escrow for seller’s signature to be signed before a Notary Public)
• Deliver keys to Buyer direct

Buyer Responsibilities:

• Opening deposit
• New lender name and loan agent phone number
• How you are going to “take title” to the property  (contact your CPA for advise)
• Obtain fire insurance
• Sign loan documents
• Final closing funds in the form of CA Cashier’s Check or wired funds

Duties that the Escrow Holder Will Perform:

• Prepare escrow instructions and conveying documents  for signature of Buyer and Seller
• Order preliminary title report from Title Company (to verify seller’s ownership and any liens against the property)
• Order any payoff statements on any deed(s) of trust(s) or other liens of record, that will be paid from Seller’s proceeds at the close of escrow
• Provide certified copies of escrow instructions and preliminary title report to Buyer’s lender
• Coordinate with Buyer’s lender for signing of loan documents
• Prepare Buyer’s estimated closing statement  for signature (showing loan charges and other agreed to buyer’s closing costs) and request balance of Buyers funds to be in the form of CA Cashier’s Check or wired funds
• Prepare Seller’s estimated closing statement (showing payoff charges per written demand and seller’s agreed to closing costs) for signature prior to closing
• Send to Title Company the recording documents for closing and request lender’s funds
• After documents have recorded and escrow has received in writing all recording and payoff charges from the Title Company, escrow will then balance the file and disburse seller’s proceeds and buyer’s refund check and any other disbursements required

The escrow officer is the central point of contact for all the items required in the transaction as called for in the written agreement and escrow instructions.  The only exception would be the documentation the new lender requires directly from the buyer.

It is important for the buyers and sellers to provide the documentation needed by the escrow officer in a timely manner.  The escrow process will move more smoothly for everyone if the information required by the escrow officer is given at the beginning of the escrow.

In every purchase/sale of Real Estate, the buyer is granted title to the property from the seller through the delivery of a Deed.  The escrow company/title company or an attorney prepares this Deed, and the Deed shows the seller, currently vested on title, is granting the title to the buyer, as the buyer has chosen to take title of the property.  Because there is more than one type of property Deed, some buyers may have questions about why a certain Deed was issued in the transfer of their property.

There are four types of deeds: Grant Deeds, Warranty Deeds, Special Warranty Deeds, and Quitclaim Deeds.  A Grant Deed or general Warranty Deed is normally used in the transfer of residential real estate, while a Special Warranty Deed is typically used in Commercial property.  Special Warranty Deeds are also now more commonly being used in the transfer of REO, or Real Estate Owned, properties.

In all Grant Deeds the grantor gives a “general warranty” of title against any claims.  With a Grant Deed and a Warranty Deed, the grantor’s warranty applies to any period of time, while the grantor held title or before they held title.  In a Special Warranty Deed, the grantor gives the warranty for only the time period in which they held title to the property.   Quitclaim Deeds are most often used to transfer title to family members, divorcing spouses, or to people who know each other.

All warranty given through a Deed pertains only to the condition of the title of the property.  It has nothing to do with the condition of the physical property.  The Deed must also include the legal description of the property as well as the APN Number that is displayed on the tax rolls for the property.  The Deed is prepared in accordance with the type of property that is being transferred, or per specific instructions provided by the seller, and is usually recorded within one business day after escrow has received receipt of loan funds.

The state of California views Grant Deeds, Warranty Deeds, and Quitclaim Deeds as the same thing.  The Deed conveys ownership, and the title insurance company will insure that the buyer receives clear title to the property they are purchasing and guarantees against encumbrances.  As long as buyers go through an escrow and receive title insurance at the close of their escrow, they do not need to be concerned with the type of Deed that is used to transfer the property into their names.

An Impound Account, also known as an Escrow Impound Account, is an account set up and managed by mortgage lenders to pay property taxes and insurance on behalf of the home buyer.  These accounts are set up with the lender during escrow to ensure that the home buyer’s property taxes and insurance are paid on time and in full.  The biggest misconception with the Impound Account is that it is managed by the escrow company.  However, after escrow collects the initial deposit for the Impound Account and after the transaction is closed, the escrow company is no longer involved.

How It Works:
Each month, an amount equal to about 1/12 of the total sum of the annual property taxes and insurance due is collected from the buyer, along with their mortgage payment, and placed inside the account.  When the time comes to pay the annual property taxes and insurance, the lender makes the payment from the funds accumulated in the account on the behalf of the buyer.

Setting up an Account
The account is set up by the mortgage lender during escrow.  Escrow collects an Escrow Impound Deposit, which is typically a deposit of 2-6 months worth of taxes and insurance.  Due to the fact that property taxes can be adjusted and insurance rates can change, this deposit ensures there are sufficient funds to make the payments in full when they are due.

Common Questions Regarding an Escrow Impound Account:

Is it mandatory to have an Escrow Impound Account?
No.   The buyer may elect to pay property taxes on their own, and there is usually a small fee when waiving the account.  However, based on the type of loan, the lender may require the buyer to have one.

Is it a good idea to have an Escrow Impound Account?
Since the property taxes and home insurance bills only come about twice a year, many average Americans have a hard time saving for them, and gladly give their money to the loan company interest free.  This is one less thing to worry about, as the lender makes the payments for the buyer.

Do I have to decide now whether or now I wish to set up an account?
If it is not a condition of the loan, the buyer does not have to make an immediate decision.  However, depending on the lender, there may be a cost to set it up at a later date.

The purpose of impound accounts is to help home owners pay their annual property taxes and insurance on time.  For more information on your account, payments and more information on how they are managed, contact your mortgage lender.

Tuesdays, here at the Coachella Valley Escrow website, we post Technology Tips designed to help you, the REALTOR®, grow your business, keep up to date on the latest technologies, and move you forward into the new era of real estate.

Today, QR codes, or “Quick Response” codes, can be found in newspapers, magazines, brochures, billboards, even on the back of business cards.  Think of them as “image hyperlinks” in the form of a bar code.  Businesses and marketers use them today to take their consumer to a customized URL using their cell phone.

How does it work?

Any person with a smart phone can take a picture of the QR code (using any QR code reader software).  After the photo is taken, the software will direct the user to a specific landing page associated with that particular code.  These codes can be scanned from printed ads, signs, t-shirts, even computer screens.  By scanning a QR code, smart phone users can access a wealth of more detailed information while on the go.

This technology is being used in many different markets, and is especially making its presence known in real estate marketing.  Real Estate agents have incorporated QR codes on “For Sale” signs, large window ads, flyers, etc. The possibilities are endless.  Once someone scans the code, the customized URL they are directed to could feature details of the home for sale, a view of the floor plan, colorful photos, a video of the inside, a map showing details of the location or additional properties around the area, etc.  They could even be given a way to contact the listing agent immediately.

QR codes make it easy for prospects to get information on properties instantly and easily.  Instead of remembering an advertised URL, it’s so much more convenient to simply take a photo on a cell phone and be redirected within seconds to the customized URL.  There are many different QR code generator websites, such as www.qrstuff.com and www.interlinkone.com , and QR code reader software, such as I-Nigma, Optiscan, and QuickMark.  Generate your free code today to begin using the latest strategies and trends in real estate marketing.

One of the many important documents received by Escrow from a lender is the Truth in Lending Disclosure Statement (TIL).  The TIL disclosure statement is one of the most misunderstood documents required for closing, and Escrow Officers are often faced with many questions from the borrower regarding this document. This post is designed to educate the borrower (purchase or refinance) as to how to best understand the Truth in Lending Disclosure Statement. 

A lender is required to give the borrower a Truth in Lending “statement” containing information on the loan’s annual percentage rate (APR), the finance charge, the amount financed, schedule of payments, and the total payments required. The statement may also contain information on security interest, late charges, prepayment provisions, and whether the mortgage is assumable.  The lender will require that the TIL disclosure statement is signed by the borrower along with many other loan documents, all of which must be received back into Escrow.

What is a TIL?

It is important to understand that the TIL statement is not an agreement between the borrower and the lender. It is a federal-required disclosure document (Regulation Z) under The Truth-in-Lending Act (TILA), which is an important part of the federal Consumer Credit Protection Act. The TIL disclosure statement requires complete disclosure of all credit terms, conditions and consumer costs of obtaining credit. Unlike the “Good Faith Estimate” document which discloses an entire sale transaction’s cost, Truth-in-Lending deals only with the cost of the loan.

Understanding the APR Calculation in the TIL Statement

One of the most common questions Escrow receives regarding the TIL statement often has to do with the annual percentage rate.  This piece of information in the TIL statement often confuses borrowers, as the APR calculation is prominently displayed on the document. It is not uncommon for a borrow to panic when they are presented with the statement during Escrow and loan document signing, as the APR is usually higher than the agreed contract interest rate of the loan.

To many borrowers APR, or “annual percentage rate”, sounds a lot like “interest rate.” The APR is not an interest rate. It is a measure of the total cost of credit, expressed as a percentage rate. The contract interest rate is defined in the promissory note. The purpose of the APR is to provide the borrower with a uniform measure of the total cost of a loan.  The APR calculation includes the contract interest rate in addition to the other costs of the loan, including any prepaid costs (points and fees) that are part of the cost of borrowing. The contract interest rate in the note is only one part of the finance charges. The APR is a representation of the total finance charges.

Though it is important to understand how the APR is calculated, it is equally important to thoroughly understand the other elements of the TIL statement, as the lender requires the statement is signed by the borrower and given to Escrow.  For more specific questions related to a borrower’s loan, Escrow will assist the borrower in contacting the lender representative.

In Today’s tight-lending market, individuals looking to invest have the opportunity to capitalize on some great deals and benefits when making an “all cash offer” on a property.  An “all cash offer” is an offer that does not require a third party lender.  Cash offers also make for one of the smoothest escrow processes possible.

So how does a cash offer affect escrow?

As mentioned in a previous blog posting (Life of an Escrow – Buyer’s Perspective) there are three stages of the escrow process: the opening, the processing, and the closing.  The opening and processing stages of an “all cash” escrow are no different than those of a normal escrow; however, the closing process differs slightly since there is no lender involved.  During the closing process, once the escrow officer has received the buyer’s and seller’s signed initial paperwork and has received all demands, bills and/or reports required under the contract, the escrow officer will prepare the closing amendments and any additional documents necessary for signatures.  In addition, the estimated closing statements are prepared for signatures and the buyer is made aware of the funds needed to close the transaction.  Depending on how quickly the signatures and appropriate paperwork can be collected, the escrow could potentially close in as quickly as a week!

If a buyer is considering investing in a property, they should speak with their agent to learn how paying cash can be beneficial to both parties.  These benefits might include:

• A seller possibly accepting the “all cash offer” rather quickly, even if it’s not the highest offer, or one of many
• A seller finding an “all cash offer” more attractive because a buyer who is purchasing “all cash” is generally highly motivated to close escrow quickly
• No appraisal inspection/appraisal review issues or delays
• No loan or underwriting issues or delays
• Parties having the option to waive certain reports or inspections that they are not interested in paying for, that a lender may require as part of the loan process
• The buyer paying less money in closing costs

Upon the escrow officer’s receipt of all conditions of the purchase contract being met, the buyer’s final wired closing funds, and the final signed paperwork from the buyer and seller, the escrow is ready to close. Escrow then coordinates the recording with the Title Company.  (Though all counties have different guidelines for recording times; most recordings take place the following business day.)  The real estate transaction is considered closed when the Grant Deed is stamped and recorded in the County Recorder’s Office.  Because there is no lender involved in an “all cash escrow”, the escrow tends to close faster and is considered a much smoother process.

If you have any furhter questions about all cash escrows, feel free to contact us.

For some, the escrow process can be perceived as confusing, perhaps even overwhelming at times.  Buyers and sellers are dealing with deadlines, mounds of paperwork, and signatures galore. It is not uncommon to feel anxious and have questions during the process.   As the neutral third party at the center of the transaction, escrow’s goal is to facilitate the transfer of property from the seller to the buyer. To help give buyers and sellers a better understanding of the entire process, we put together a Life of an Escrow overview flowchart.

Life of an Escrow

As the chart illustrates, the escrow company is the neutral third party that facilitates the closing process when real estate is purchased or sold.  Escrow is involved in many of the details regarding the purchase or sale transaction. It is common for there to be myriad of details, and escrow works with many different parties, such as a title company, mortgage banker, seller’s agent, etc., during the escrow process. It is important to also understand that escrow holds the money associated with the transaction until the requirements of the contract are accurately completed. Once escrow has facilitated the completion of the legal and contractual items, the transaction is recorded at the county and the buyer becomes the new legal owner of the property.

There are many details buyers and sellers should become aware of to facilitate a smooth escrow process.  Many of these details are items we discuss on our blog in an effort to help demystify this complicated process.  The chart above serves as the foundation for most transactions and can be used as a basis for further discussion or questions you may have with your escrow officer.