Articles Posted in Tax Implications

Is Investing Homestead Sale Proceeds Okay?

Florida Constitution provides protection from forced sale to homestead property from most creditors. Art. X, § 4, Fla. Const. The protection covers not only the physical homestead property but also the proceeds from the sale of the homestead, provided the proceeds are reinvested in another homestead property. In a scenario where you invest the homestead sale money in securities and then buy another homestead with it, does the money retain homestead protection?

The Florida Supreme Court answered this question in the affirmative in a recent 2016 decision JBK Assocs. v. Sill Bros., 191 So. 3d 879 (Fla. 2016). In that case, JBK Associates, Inc. (“JBK”) obtained a final judgment against Mr. Sill for $740,487.22.  Mr. Sill had consequently opened a brokerage account with Wels Fargo and deposited the sale proceeds from the marital home of Mr. Sill and his ex-wife. The account was titled “FL Homestead Account” and was split into three sub-accounts, one containing cash and two containing mutual funds and unit investment trusts.

Florida: A Safe Haven for Surviving Spouses in Probate

          Marriage is one of the most sacred and respected institutions in our society.  Both state and federal governments provide benefits to encourage marriage with beneficial incentives. Florida provides several benefits for surviving spouses as illustrated in Florida’s Constitution and Probate Code. This article reviews some of those benefits but is not an exhaustive list.

First, surviving spouses receive protection under Florida’s Homestead Exemption.  The Florida Constitution prohibits a decedent from freely devising his or her homestead, when the decedent is survived by a spouse or minor child. Art. X, § 4 (c), Fla. Const.  However, the decedent can devise a homestead to his surviving spouse if there is no minor child. § 732.4015 (1), Fla. Stat. (2010).  If a decedent tries to devise a homestead to someone other than a surviving spouse or minor child under a will, then the homestead property will be transferred to the decedent’s surviving spouse and the decedent’s descendants, with the surviving spouse receiving a life estate in the homestead and the descendants receiving a remainder, per stirpes at the decedent’s death.§ 732.401 (1), Fla. Stat. (2012).  Alternatively, “the surviving spouse may elect to take an undivided one-half interest in the homestead as a tenant in common, with the remaining undivided one-half interest vesting in the decedent’s descendants in being at the time of the decedent’s death, per stirpes.”  § 732.401 (2), Fla. Stat. (2012).  To receive the homestead exemption, “an individual must have an ownership interest in a residence that gives the individual the right to use and occupy it as his or her place of abode.”  In re Alexander, 346 B.R. 546, 551 (Bankr. M.D. Fla. 2006).

FIRPTA: Increased Withholding and Other Changes

Most professionals have familiarity with the Foreign Investment in Real Property Tax Act (“FIRPTA”), especially those that have foreign clients investing in U.S. real estate. On December 18, 2015, the President signed into law the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”).  The PATH Act significantly alters FIRPTA withholding for foreign persons disposing of investments in U.S. real estate.  Realtors, accountants, closing agents and title companies need to familiarize themselves with the changes.

The PATH Act increases the FIRPTA withholding rate from 10 percent to 15 percent on certain dispositions and distributions of United States Real Property Interests (“USRPIs”).[1]  Similarly, the withholding rate for the transfer of a partnership interest or the beneficial interest in a trust or estate has been increased from 10 percent to 15 percent.[2]  The new withholding rate applies to all such dispositions that take place after February 16, 2016.[3]  However, the new FIRPTA rules allow for a 10 percent withholding rate where the amount realized on the disposition of property being used as a residence is between $300,000.00[4] and $1 million.[5]  In other words, if a foreign person sells his or her personal residence for $999,000.00 the amount to be withheld shall be $99,900.00.  However, if the foreign person sells his or her personal residence for $1,000,100.00, the amount to be withheld on the sale shall be $150,015.00.  The amount withheld is offset by the gain on the disposition of the USRPI and is refundable to the extent the amount withheld exceeds the underlying tax liability.[6]  The increased FIRPTA withholding rate is not an actual increase in tax, but a means of ensuring compliance with U.S. tax law.  An exemption found in the old rule remains in place, providing that a foreign person is not subject to FIRPTA withholding where the property sold is used as a residence and the amount realized does not exceed $300,000.00.[7]