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Thursday, October 11, 2018

The New “Newlywed” Exception to Documentary Stamp Taxes

Florida imposes documentary stamp taxes on transfers of Florida real property. The tax is based on the consideration paid for the property. Generally, if real property that is transferred is encumbered by a mortgage and the purchase price is less than the mortgage amount (or there is nothing otherwise paid), the mortgage amount is treated as consideration for purposes of calculating the tax.

This tax arises on transfers of encumbered real property, even if the transferor and transferee are married to each other. Given other exemptions for intra-spousal transfers under law (e.g., as to the federal estate tax, and under the Save Our Homes cap on ad valorem taxes), this is surprising and somewhat disheartening. Oddly enough, Florida law will NOT impose the tax on transfers of a marital home between spouses or former spouses when the transfer is incidental to a divorce. Fla.Stats. §201.02(7)(a). Of course, if there is no mortgage on the property and nothing is paid for the property, an intra-spousal transfer will not be subject to stamp taxes.

Under a new provision of law that came into effect in July, spouses can now transfer encumbered homestead property between themselves without incurring documentary stamp taxes, if no other consideration is paid. However, this new provision applies only to transfers within one year of marriage. Therefore, newlyweds can use it – spouses who have been married over a year cannot. This one year limit is also a trap for unwary newlyweds – if they take more than a year to reorganize their real property holdings, the tax will apply.

As noted, the transferred property must be homestead property. The applicable definition of “homestead” for this purpose is the ad valorem tax definition under Fla.Stats. §192.001 and the ad valorem tax provisions of s. 6(a), Art. VII of the Florida Constitution.

Any tax exemption is a good exemption (from the perspective of taxpayers), but the limitation of this new exception to newlyweds seems unduly restrictive. It appears to allow newlyweds to add a spouse to the title as part of new marriage restructuring, but why not open it up to other transfers? For example, spouses that desire to transfer homestead property owned by one spouse to TBE so as to allow for an automatic transfer at death to the surviving spouse should be able to do so without the tax. As matters stand now, if there is a large mortgage on the property, the stamp taxes can make such transfers and planning cost prohibitive.

Fla.Stats. §201.02(7)(b)

Sunday, October 07, 2018

New Homestead Diagram

Many years ago I prepared a diagram in table format that simplified the restrictions on transfers of Florida homestead property. This has been downloaded thousands of times and I hear is used by many legal and real estate professionals. You can download a copy here.

I have re-worked the analysis into a flow chart type approach, for those that prefer that type of analysis. The new chart also reflects when an item is “protected homestead” for Florida law purposes. You can download a copy here.

Either one will help get you to the right result. I actually like the flow chart approach since after you use it a few times, it will burn much of itself into your memory so many times you will no longer need to consult it.

Future editions of my treatise, Rubin on Florida Homestead, will include both diagrams. Prior purchasers, whose versions do not include the new chart, can use these download links to gain access to it.


Friday, September 28, 2018

The Transitory Nature of the Estate Tax Exemption Amount

With $11.18 million of cover under the unified credit under the 2017 tax act, more estates than ever are exempt from federal estate tax. This is especially so for married individuals, who have double this amount and the benefits of portability to help make effective use of both spouse’s exemption amounts.

Clients need to be reminded that this exemption amount is NOT permanent. Come 2026, the exemption will return to pre-2017 tax act levels, adjusted for inflation. So the exemption will be cut in half (approximately). But it is not just the built-in changes that need attention – it is the political reality that if there is a change in power in Washington, there is a substantial likelihood that the Democrats would seek to lower exemptions even farther (and/or increase estate tax rates).

This was brought home recently via proposed legislation of Elizabeth Warren, a possible 2020 presidential candidate. A recent article notes:

Warren’s office says her bill would lower the exemption to what it was at the end of President George W. Bush’s administration in 2009 — $3.5 million for individuals or $7 million for couples — and tax the value above that threshold beginning at a rate of 55 percent. Warren’s bill also includes progressive, marginal estate tax rates with higher thresholds: 60 percent on anything over $10 million for an individual or $20 million for a couple and then 65 percent on anything over $50 million for an individual or $100 million for a couple. For estates worth more than $1 billion, all of those rates would be increased 10 percent across the board to 65 percent, 70 percent, and 75 percent, respectively.

Even if Congress and President Trump can make the 2017 tax act provisions “permanent,” there really is no such thing as permanent. A willing Congress and President can pass whatever changes they want in the future.

Planners and taxpayers alike ignore the of possibility of a reduced exemption at their own peril. At a minimum, consideration should be given in marital planning to what would be the best disposition plan at the death of the first spouse based both under current exemption amounts and what would be best if exemption amounts are materially lowered. Consideration should also be given to using the higher exemption amounts before they are rescinded (for those that can afford to do so).

3 things to know about Elizabeth Warren’s new housing bill