Legal Talk: What in the World is FIRPTA?

BY RICHARD S. POE
PARTNER, LANCASTER, TROTTER AND POE, PLLC

From Insight Magazine, a publication of NC REALTORS®

The following is a fictional (but very plausible) conversation between Betty Broker and Larry Lawyer:

BETTY: Hello, Larry. This is Betty. I hope your New Year is going well, and you and your family are dodging COVID so far.

LARRY: Thanks, Betty! How can I help you today?

BETTY: Well, I have a closing coming up with you in a few weeks in which I am the listing agent for Manuel and Consuela Ramirez, a lovely couple from Ecuador. They plan to return to Ecuador after selling their home here, and a friend recently told them that part of the sales price might be withheld from them at the closing. Why would that be?

LARRY: Well, Betty, there is a law known as the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). In certain circumstances, a settlement agent is required to withhold a portion of the sales price from the seller at closing if the seller is not a U.S. citizen. There are many possible scenarios and many exceptions to the general rule, but it might be required.

BETTY: How do my folks find out if there will be withholding on their transaction?

LARRY: I am not a tax lawyer, so the Buyer and the Seller in this situation should be advised to seek tax advice from a qualified tax professional. However, here are several basic rules:

1. If the seller is selling to a buyer who intends to occupy the property as his or her principal residence and the purchase price is $300,000 or less, no withholding is required.
2. If the seller is a resident alien (holder of a green card), he or she is treated the same as a U.S. citizen and no withholding is required regardless of the purchase price.
3. If the seller applies for and obtains a FIRPTA Withholding Certificate from the IRS prior to closing, no withholding is required. Eligibility for a Withholding Certificate would be determined by a tax professional.

BETTY: Well, my sellers do not have green cards, and the house is selling for $500,000, so does that mean they will not get part of their proceeds following closing?

LARRY: Probably so, unless they qualify for a Withholding Certificate for some reason. But even if they do qualify, it’s unlikely the IRS would issue a Certificate in time for a closing in a few weeks. So, in all likelihood, I am going to have to withhold 10% (or $50,000) of the purchase price from the sellers’ proceeds and send it to the IRS. Once the sellers file the last tax return they are required to fi le, my understanding is they can apply for a refund of any of the withheld amount that exceeds their final tax liability.

BETTY: Wow! So, what do I need to put on my checklist so I adequately warn my clients in the future?

LARRY: Here are the questions that you need to know the answers to every time:

1. Is the seller a citizen of another country?
2. If so, does the seller have a green card?
3. Is the buyer going to use the property as his or her principal residence? If so, is the purchase price $300,000 or less?
4. Is the buyer going to use the property as investment property? In this case, if the seller is a citizen of another country and doesn’t have a green card, withholding is required no matter the price.
5. Does the seller qualify for a FIRPTA Withholding Certificate in the opinion of a tax professional?

BETTY: Thanks for the heads up. This is definitely going on my checklist. Is the anything else I should know?

LARRY: Just a couple of things to keep in mind:

1. If the sales price exceeds one million dollars and withholding is required, the withholding increases to 15% of the sales price.
2. The way the law is written, the buyer is responsible for making sure the withholding is done properly. So, if the withholding is not done properly or not delivered to the IRS within 20 days from closing, the buyer will be penalized and charged with late fees by the IRS. As a practical matter, since closing attorneys usually represent buyers, this liability would fall on the closing attorney.
3. Buyers and sellers in this situation are both advised to seek professional tax advice and not simply depend on your real estate attorney unless he is also a qualified tax expert.

Have a great 2021, and stay safe and well!!!

Allan R. Dameron Legal Internship Award 2021

At its June 16, 2021 meeting, the Commission awarded the Allan R. Dameron Legal Internship Award to Amelia Poore. This annual award is given in honor and memory of Allan Dameron who served on the Commission for nearly eight years beginning in 1999, including two terms as Chairman. Mr. Dameron was also a former Dean of the REALTOR Institute, and past president of the North Carolina Real Estate Education Foundation. 

Each year, the award is given to a North Carolina law student who has demonstrated an interest in public service and in real estate. Amelia is a rising third year law student at Campbell University Law School where she works with the Stubbs Bankruptcy Clinic and in the law library. Prior to law school, Amelia was an elementary school teacher and, while teaching, also earned her Master’s degree in elementary education and teaching from Meredith College. She is also a graduate of Wofford College in Spartanburg, South Carolina, where she received her Bachelor of Arts degree in English.

Employment Opportunities Available

Are you interested in joining the staff of the North Carolina Real Estate Commission? From time to time, employment opportunities become available. They are posted on the Commission’s website under the “About Us” tab. Click here for more information.

Current Stats: Monthly Licensee Count as of June 1, 2021

My license has expired! How do I reinstate it?

To maintain a current license, brokers must renew their license annually between May 15 and June 30. The license of a broker who fails to renew during that period will expire on June 30, and that broker must cease all brokerage activities immediately. 

What steps must a broker take to reinstate an expired license? That answer depends on how long the license has been expired.

To reinstate a license expired for less than 6 months:

1. go to the Commission’s homepage (www.ncrec.gov);
2. click on Reinstate your License;
3. enter your license number and PIN (last 4 of your SSN unless you have changed it);
4. answer required questions; and
5. pay the $90 reinstatement fee.

NOTE: To regain active status, a License Activation / Affiliation form (REC 2.08) also must be submitted.

To reinstate a license expired for 6 months but no more than 2 years:

1. Successfully complete one 30-hour Postlicensing course (the course must be completed within 6 months prior to submitting reinstatement application); and
2. Submit a reinstatement application with the $90 application fee and all required documentation, including a criminal background report from the Commission’s provider;

-OR-

1. Submit a reinstatement application with the $90 application fee and all required documentation, including a criminal background report from the Commission’s provider; and
2. Pass the National and State sections of license exam.

NOTE: To regain active status, a License Activation / Affiliation form (REC 2.08) also must be submitted.

To reinstate a license expired for more than 2 years:

1. Successfully complete the 75-hour NC Broker Prelicensing course;
2. Submit a license application with the $100 original application fee and all required documentation, including a criminal background report from the Commission’s provider; and
3. Pass the National and State sections of license exam.

NOTE: You will be licensed as a provisional broker and be subject to the 90-hour Postlicensing education program. To gain active status, a License Activation / Affiliation form (REC 2.08) also must be submitted.

For more information, review Commission Rule 58A .0505 or visit the “Reinstate your License” page on the Commission’s website. You may also contact the Commission’s Education & Licensing Division at LS@ncrec.gov or 919-875-3700.

Disciplinary Actions

MICHELLE BARNETT ANDREWS (CHARLOTTE) – By Consent, the Commission suspended the broker license of Ms. Andrews for a period of 6 months effective June 10, 2021. The Commission then stayed the suspension in its entirety. The Commission found that Ms. Andrews acted as the co-listing agent for residential property which she knew had been extensively renovated. Ms. Andrews failed to verify that permits were pulled as required for some of the renovation work and failed to disclose that they were not pulled before the buyer made an offer. Once Ms. Andrews discovered, during the due diligence period, that permits were not pulled, she notified the buyers’ agent. The buyers closed on the property after being informed that the seller entity was in the process of obtaining the proper permits. In another residential sales transaction, Ms. Andrews again acted as the co-listing agent. This transaction included four previous buyers, who terminated for various reasons, and a 5th buyer who ultimately purchased the property. During the course of the listing, three buyers shared their home inspection reports with Ms. Andrews who shared them with the seller. The seller made some, but not all of the repairs noted in the reports but Ms. Andrews failed to discover and disclose the uncorrected material defects to subsequent buyers.

BEE HOME SOLUTIONS INC. (CHARLOTTE) – By Consent, the Commission suspended the broker license of Bee Home Solutions Inc. for a period of 12 months effective June 10, 2021. The Commission then stayed the suspension in its entirety. The Commission found that Bee Home Solutions Inc. listed a residential property for sale. The property was owned by the firm’s broker-in-charge, through another business entity. The seller entity had made extensive renovations to the subject property but failed to ensure that all required permits were pulled. Bee Home Solutions Inc. and its agents failed to disclose this before the buyer made an offer, however, once the Firm’s listing broker discovered, during the due diligence period, that permits were not pulled, she notified the buyers’ agent and the buyers closed on the property after being informed that the seller entity was in the process of obtaining the proper permits. In another residential sales transaction, Bee Home Solutions Inc. again acted as the listing firm for property owned by an entity owned by its broker-in-charge. This transaction included four previous buyers, who terminated for various reasons, and a 5th buyer who ultimately purchased the property. During the course of the listing, previous buyers shared three of their home inspection reports with the firm’s employee who shared them with the broker-in-charge. The seller entity made some, but not all of the repairs noted in the reports but Bee Home Solutions Inc., and its agents, failed to disclose the uncorrected material defects to subsequent buyers.

KENT ALLEN DAUDERMAN (SPRUCE PINE) – By Consent, the Commission suspended the broker license of Mr. Dauderman for a period of 18 months effective April 1, 2021. The Commission then stayed the suspension in its entirety. The Commission found that Mr. Dauderman managed properties for others through his sole proprietorship. A review of his trust account records found that Mr. Dauderman failed to perform monthly reconciliations, failed to maintain a trial balance, failed to include the proper identifying information on deposited checks, and failed to maintain journals and ledgers. Mr. Dauderman also allowed deficit spending leading to a shortage in the accounts.

MARION DENISE EDWARDS (KINGS MOUNTAIN) – By Consent, the Commission reprimanded Ms. Edwards effective June 10, 2021. The Commission found that Ms. Edwards acted as the agent of the buyers for the purchase of residential buyers informed Ms. Edwards that they wanted closing to take place at the end of July and Ms. Edwards communicated that the seller would not wait that long so the buyers executed a contract with a June closing date. Ms. Edwards and the listing agent disagree as to whether or not this request was communicated to, and considered by, the sellers. Nevertheless, during the due diligence period, Ms. Edwards forwarded a Due Diligence Request and Agreement (“DDRA”) to the listing agent without going over the specifics of the request with her buyer-client and which lacked their signature. The sellers agreed to the repairs noted on the DDRA and signed the document which was then sent to buyers. The buyers were unhappy that all of their repair requests were not addressed on the DDRA, but ultimately signed the document. The Commission notes that after closing, all repairs requested by the buyers have been completed to their satisfaction.

EITHIEL LYNN SMITH ESTES (BURLINGTON) – By Consent, the Commission reprimanded Ms. Estes effective June 15, 2021. The Commission found that Ms. Estes acted as a buyer agent for a residential purchase. The buyer had a home inspection performed which noted issues with floor joists, footings, girders, piers, windows, and electrical, among others. The home inspector also recommended a general contractor, engineer, plumber, and electrician visit the property for further evaluation. The buyer purchased the property after some repairs were made to the electrical system and received a credit of $2,200 to make additional repairs. The next year, Ms. Estes acted as the listing agent for the sale of the subject property, representing her former buyer client as seller. The seller failed to complete all questions on the property disclosure form, but Ms. Estes provided the incomplete form via the MLS. Ms. Estes was informed by the seller prior to listing the property, that certain repairs had been completed, but failed to inquire further or request documentation. The final buyer’s home inspection report noted some of the same issues as noted in the previous report obtained by the seller at the time of his purchase of the home.

LAURIE L JARRETT (HAW RIVER) – By Consent, the Commission reprimanded Ms. Jarrett effective June 10, 2021. The Commission found that Ms. Jarrett as the qualifying broker/broker-in-charge, of a licensed firm providing property management services, failed to identify the purpose for all checks, failed to maintain ledgers or journals in compliance with Commission rules, and failed to perform monthly reconciliations. Ms. Jarrett also failed to maintain copies of all transaction related documents for a period of three years as required by Commission rule. Ms. Jarrett and the firm have now ceased managing properties and turned over all monies to the property owners or their new management companies.

LAKE NORMAN CORNELIUS NC LLC (CORNELIUS) – By Consent, the Commission suspended the broker license of Lake Norman Cornelius NC LLC for a period of 12 months effective May 1, 2021. The Commission then stayed the suspension in its entirety. The Commission found that in and between May 2015 and August 2015, Lake Norman Cornelius NC LLC failed to properly account for trust money in its trust account and failed to create, maintain, and retain trust account records.

WILLIAM D MORGAN (MOORESVILLE) – By Consent, the Commission suspended the broker license of Mr. Morgan for a period of 12 months effective June 8, 2021. The Commission then stayed the suspension in its entirety. The Commission found that in and between May 2015 and August 2015, Mr. Morgan as the qualifying broker/broker-in-charge of a licensed firm, failed to properly account for trust money in the firm’s trust account, and failed to create, maintain, and retain trust account records.

MICHAEL TIMOTHY MOULTON (CHARLOTTE) – By Consent, the Commission suspended the broker license of Mr. Moulton for a period of 12 months effective June 10, 2021. The Commission then stayed the suspension in its entirety. The Commission found that Mr. Moulton was qualifying broker/broker-in-charge of a licensed firm which listed a residential property for sale, which was owned by a company also owned by Mr. Moulton. Mr. Moulton, through the seller entity, made extensive renovations to the subject property but failed to ensure that all required permits were pulled, and failed to disclose this before the buyer made an offer. Once the listing broker discovered, during the due diligence period, that permits were not pulled, they notified the buyers’ agent. The buyers closed on the property after being informed that the seller entity was in the process of obtaining the proper permits. In another residential sales transaction, Mr. Moulton’s firm again acted as the listing agent for property owned by his other company. This transaction included four previous buyers, who terminated for various reasons, and a 5th buyer who ultimately purchased the property. During the course of the listing, the previous buyers shared three of their home inspection reports with the listing broker who shared them with him. Mr. Moulton made some, but not all of the repairs noted in the reports and failed to disclose the uncorrected material defects to subsequent buyers.

KHUONG M NGUYEN (CHARLOTTE) – By Consent, the Commission suspended the broker license of Mr. Nguyen for a period of two years effective February 1, 2021. The Commission then stayed the suspension after a four month active suspension period. The Commission found that Mr. Nguyen, acting as the qualifying broker/broker-in-charge of a firm, failed to maintain trust accounts and trust account records in compliance with Commission rules, failed to enter into and retain agency agreements with his property management client, and failed to retain leases and other transaction documents in compliance with Commission rules.

MATTHEW M REYES (MOORESVILLE) – By Consent, the Commission suspended the broker license of Mr. Reyes for a period of 12 months effective June 8, 2021. The Commission then stayed the suspension in its entirety. The Commission found that in and between May 2015 and August 2015, Mr. Reyes as the qualifying broker/broker-in-charge, of a licensed firm, failed to properly account for trust money in the firm’s trust account, and failed to create, maintain, and retain trust account records.. Mr. Reyes self-reported the trust account shortage to the Commission.

WENDY D SMITH (MOORESVILLE) – By Consent, the Commission suspended the broker license of Ms. Smith for a period of three months effective June 8, 2021. The Commission then stayed the suspension in its entirety. The Commission found that in and between May 2015 and August 2015, Ms. Smith as the qualifying broker/broker-in-charge of a licensed firm, failed to properly account for trust money in the firm’s trust account, and failed to create, maintain, and retain trust account records.

THE CHARLOTTE REAL ESTATE FIRM LLC (CHARLOTTE) – By Consent, the Commission suspended the broker license of The Charlotte Real Estate Firm LLC for a period of two years effective February 1, 2021. The Commission then stayed the suspension after a four month active suspension period. The Commission found that The Charlotte Real Estate Firm LLC failed to maintain trust accounts and trust account records in compliance with Commission rules. The Charlotte Real Estate Firm also failed to enter into and retain agency agreements with its property management client, and failed to retain leases and other transaction documents in compliance with Commission rules.

BEWARE OF SCAMMERS!!

Have you gotten the calls about your car warranty or computer security? How about receiving an email or text message from someone who appears to be someone you actually know, but in fact is not? We’ve heard about wire fraud and all know at least one story where a client has either potentially or actually sent their funds to a scammer. 

The Commission has learned of a recent scam where the scammer called the licensee pretending to be a law enforcement officer with an arrest warrant for the licensee for failing to appear at a hearing related to the licensee’s client. The caller knew enough about the licensee’s business and personal information to appear legitimate and then strongly encouraged the licensee to pay “bail” online rather than face actual arrest. These scammers may gather information about you, your clients, and your family from various online sources or actual hacking of emails 

When you become a licensee you often begin your quest to find clients. This quest entails putting your contact information out for public access. It’s like going fishing with a big net. You throw out the net hoping to catch all the big, prime fish but when you pull it in it also has boards, boots, tires and jellyfish. Putting your contact info out there invites attention, some of which may be unwanted. Note that the Commission requires licensees to provide an email address to allow the Commission to communicate and deliver important information. The licensee may choose to designate a private email address which is not a public record and is not made available to third parties.

Awareness is your best defense. A caller may appear legitimate. A conman’s job is to gain your trust or to put you in enough of a panic that you do whatever they say. Any unsolicited calls where the caller requests money, confidential information, control of your computer, or access to an account, especially under threat of duress, should always be met with skepticism. Be aware – your net may catch some unwanted attention. Always check out the source of the call to make sure it’s legitimate and don’t be caught off guard. Don’t panic. Take your time, take a breath, and think the situation through before providing what the caller wants. As the Sarge said in Hill Street Blues, “Let’s be careful out there.”

Appearances

Steve Fussell, Chief Consumer Protection Officer, spoke at NARPM Crystal Coast Chapter Meeting on May 18.

Dee Bigelow, Information Officer, spoke at Greenidge Realty’s Various Topics Meeting on May 18.

Fred Moreno, Chief Deputy Legal Counsel, spoke at the Women’s Council of REALTORS Crystal Coast’s Professional Development Series on May 19.

Disciplinary Actions

JERRY CLAYTON VASSEY (CHARLOTTE) – By Consent, the Commission reprimanded Mr. Vassey effective April 15, 2020. The Commission found that Mr. Vassey, as the broker-in-charge of a firm, failed to supervise two Provisional Brokers who acted as co-listing agents where they failed to disclose material facts to subsequent buyers after receiving home inspection reports from two previous buyers who terminated their contracts on the subject property.

Building Permits – A Broker’s Responsibility

The requirements for obtaining building permits for original construction, additions, renovations, and repairs are determined by county and/or municipal building inspection offices. These requirements can be complex, may change over time, and may be different from one county/city to another. Brokers are not expected to know or remember all of the requirements for obtaining building permits. However, brokers have a duty to disclose material facts and part of fulfilling that duty is verifying information – including permitted or non-permitted changes.

When a broker lists a new home for sale, the broker should ask the builder for a copy of the Certificate of Occupancy (aka “CO”) and give a copy of it to the buyer or buyer’s agent. The issuance of a CO confirms that the builder obtained the necessary building permit(s) in advance, that the house/building was fully inspected by the building inspections office during its construction, and that its construction complies with the building code. If a CO is not yet available, then the seller’s agent should disclose this fact to a prospective buyer and ensure that the buyer receives a copy of the CO at or before the closing.

When brokers list properties for sellers, especially properties being flipped, the brokers should inquire about all of the renovations, additions and repairs their seller-clients have made. The brokers should make a good faith effort to obtain copies of vendor invoices from the sellers referencing the work that was done, when, and by whom. The brokers should then contact their local building inspection offices to inquire whether permits and/or occupational licenses were required, whether permits were pulled and, if so, obtain copies of the permits. If a broker discovers that the seller failed to obtain a required permit or failed to hire a licensed professional when a license was required, then this is a material fact that the broker must disclose to all prospective buyers, even if the seller chooses not to disclose it.

This same requirement holds true when brokers renovate, add on to, or repair their own properties as flippers or owner-occupants. The broker must obtain all required permits and hire licensed professionals when it is required. If the broker fails to do so, it is a material fact which the broker-seller must disclose to all prospective buyers (or their agents).

N.C.G.S. §160D-1110 (c) states that no permit is required for any construction, installation, repair, replacement, or alteration performed in accordance with the current edition of the North Carolina State Building Code costing fifteen thousand dollars ($15,000) or less in any single-family residence unless the work involves any of the following: (1) The addition, repair, or replacement of load-bearing structures. (2) The addition or change in the design of plumbing. (3) The addition, replacement, or change in the design of heating, air-conditioning, or electrical wiring, devices, appliances, or equipment, other than like-kind replacement of electrical devices and lighting fixtures.  (4) The addition (excluding replacement) of roofing. A local government shall not require more than one building permit for the complete installation or replacement of any natural gas, propane gas, or electrical appliance on an existing structure when the installation or replacement is performed by a person licensed (otherwise, a permit is required).  The following chart illustrates a few common renovations performed on properties in a small sample of North Carolina counties. A “YES” indicates that a permit is required for that particular renovation. You may be surprised at the types of updates that require permitting, so be careful!

Flipping homes has become a common practice in North Carolina. Flippers sometimes emphasize cosmetic improvements that greatly enhance the appearance of their properties, and unfortunately, saving money on these improvements is often a priority.  If an owner replaced an HVAC system, water heater, wiring, plumbing or other systems, then one or more building permits may have been required and the person who made those replacements was likely required to be licensed in their fields. Flippers sometimes hire unlicensed handymen to perform services that require licenses. Hiring a licensed contractor may raise the cost of the repair or improvement but will also help an owner or flipper navigate permitting requirements and help ensure that the improvements are satisfactory. Brokers should educate themselves, to be alert, and must inquire about improvements to ensure that they discover and disclose material facts.