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FUNDS RETAINED FROM THE SELLER – THE USE OF ESCROW ACCOUNTS AFTER A CLOSING
There are a few categories of real estate transactions in which certain potential liabilities could occur or “appear” after the closing. In this regards, I want to shed some light on how to handle these situations through the use of an escrow accounts are, communicate why sometimes funds need to be withheld from the seller, and when and how are the funds subsequently disbursed.
In this regards, any deposit into an escrow account requires an “escrow agreement” to be executed by the parties and the entity holding the funds. I want to further note, that the closing notary is not a party to this agreement.
The purpose use of the escrow account I am referring to in this post is quite specific and different to the use of escrow accounts for a closing across the United States. The issue I want to cover, is the need to withhold funds from the seller to protect the buyers from a potential condition that may require funds from the seller in the future.
Once a property is sold, the seller may elect to “travel the World” or go and find new adventures elsewhere. If the buyer of a property is confronted with a situation after the closing which the seller is responsible for, the buyer may have some difficulties in achieving compensation from the seller. While this is not a common occurrence and not all possibilities can be predicted, there are some circumstances which warrant the use of an escrow account.
An example of the potential need for an escrow account after the closing are property taxes.
A seller of a property has to transfer the rights to the buyer with zero balance owed and with the records properly updated. Sometimes, a property is not appraised for property tax purposes and the taxes have not been paid up to the date of the closing. Under such circumstance, a buyer may elect to proceed with the closing anyhow.
The amount of the tax exposure would be estimated by the title insurance company and the funds equivalent to this estimate would be withheld from the proceed of the sale and deposited into an escrow account until the tax situation is cleared. The amount finally owed would be paid from the escrow funds and any leftover balance (if any) would be returned to the seller.
Another situation is a loan which has been paid-off but the mortgage was not timely canceled by the seller. The buyer or his/her title insurance company would demand that a given amount of money be placed into an escrow account while the mortgage is being cancelled. Once the mortgage is successfully removed from the Property Registry, the funds held in the escrow account would be disbursed to the seller.
Regardless of the situation which warranted the use of an escrow account, once key element is noteworthy. The agreement to deposit the funds into an escrow account is by the parties in conjunction with the title insurance company who manages the escrow account. This agreement will manifest the requirements needed for the funds to be released in the future. Until those requirements are met, the funds will not be released.
The parties must understand that the eventual disbursement of the funds depends on: (1) full compliance with the requirements of the escrow agreement to the satisfaction of the entity managing the escrow funds; and (2) a consent by both parties to this entity .
Sales Tax (“IVU”) for Professional Services – October 1, 2015 is the deadline
If you are in business in Puerto Rico, or if your business is located outside of Puerto Rico but delivers services in Puerto Rico, you most likely know about what I am going to cover here. Nerverthelss, I decided to publish this brief note since this tax also affects legal services, including notary services.
Throughout my publications I communicate that I am a lawyer and a notary. I also repeadtedly state that only a lawyer admitted to practice law in Puerto Rico can become a notary, and that only a notary can perform a real estate closing in Puerto Rico.
Begining October 1, 2015, professional services has been added to the category of products or services which pay what it is normally known as “sales tax” including lawyers and notaries. The tax rate will be 4% trhough February 29, 2016, and it will jump to 10% begining March 1, 2016. Some categories of services may immediately qualify for a higher tax bracket, but you need to check with your tax expert on this.
There are very few exceptions to the general rule.
Overall, contracts executed before October 1st would not be charged the taxes even if the execution of the contract will be happening after October 1st. For example, if the parties to a closing hire a notary before October 1st for a closing scheduled for sometime after October 1st, no taxes would be levied on the services. If the notary is engaged after October 1st for a closing happening sometime thereafter, the tax would be 4%. if the notary is engaged after February 29, 2016, the tax would be 10%.
Please consult with your accountant, CPA or tax lawyer if you have any issues with professional services rendered in Puerto Rico, including professionals who do not reside in Puerto Rico but who deliver services to individuals or businesses in Puerto Rico.
Yours,
Santiago F. Lampón
Prenuptial Agreements Under Puerto Rico Law – Some Important Notes
Prenuptial agreements under Puerto Rico Law have very stringent requirements, which when absent nullify most if not all prenuptial agreements done outside of Puerto Rico.
A prenuptial agreement in Puerto Rico requires that it be done through a public deed executed before a notary public in Puerto Rico. The contents and format of the deed are very specific. Any deviation from the requirements and the agreement would be ineffective.
A prenuptial agreement in Puerto Rico must completed be done BEFORE the couple is formally married. Once the couple is married, and agreement cannot be created, any agreement cannot be change and not even corrected. If the agreement is incorrect in anyway, once the ceremony is held and the vows are exchanged, the agreement is what it is.
As a notary, I have had the opportunity to work with many prenuptial agreements. At times, I have had situations in which partner decided to engage separate counsel to review the agreement and propose changes before its execution.
If you or someone you know with ties to Puerto Rico is getting married and a prenuptial agreement is part of the equation, make sure that a Puerto Rico notary becomes involved; and of course before they walk down that isle.
Yours,
Santiago F. Lampón
Establishing Residence in Puerto Rico – Problems and Solutions
The subject of becoming a resident of Puerto Rico has many variables involved. Through this video I briefly introduce some problems and some solutions.
Why (and When to) Speak to a Real Estate Lawyer When Purchasing a Property in Puerto Rico
I am frequently asked when is the oportune time for a buyer to speak to a real estate lawyer when performing a real estate transaction in Puerto Rico. Through this video I clarify when and why.
Yes, the answer may seem obvious to most readers. My recent (surprising) experiences on this subject have motivated me to publish this video which I hope you will enjoy.
Yours,
Santiago F. Lampón
Revisions to Puerto Rico Sales Tax (“IVU”) – Business to Business Area
If you own real estate in Puerto Rico and you rent it, this video is for you. If you conduct any business in Puerto Rico, this video is for you. Please wacth it now and contact your accountant, CPA or tax lawyer promptly. The changes to the sales tax are significant, but there is one area in which the responsibility is levied completely upon the property owner. In this video, lawyer and notary public Santiago F. Lampón discusses this area of concern for subsequent consultation with your accounting/tax professional.
Property Taxes in Puerto Rico (Escrows at closing) – Part 4 of 4
Completing the series of episodes on property taxes, in this video lawyer and notary public Santiago F. Lampón covers the use of an escrow account to cover the potential liability for property taxes. While you should watch all episodes if you have questions about property taxes in Puerto Rico, this video stands on its own with regards to the execution of a closing when property taxes are owed.
Property Taxes in Puerto Rico – Part 2 of 4
Through this video, #2 in a series of 4, lawyer and notary public Santiago F. Lampón continues the discussion on property taxes in connection to real estate transactions under Puerto Rico Law. This particular video covers the segregation of a property at the property tax records, which are not the same as property registry records, for it to be assigned a property tax ID number, also known as “pin number” for property tax purposes.
The other videos in the series, describe the various areas of concerns with a conclusion on video #4 describing what to do to diminish the potential liability.
Property Taxes in Puerto Rico – Part 1 of 4
Real estate closings in Puerto Rico are distinctively unique in comparison to closings across most of the United States of America and other English speaking countries. Many individuals are not aware, that there is an almost direct relationship or “connection” between the language spoken and the legal system followed in any given country.
Across Latin America, legal systems follow closely the Spaniard System of Law. Puerto Rico is not the exception and, accordingly, our real estate transactions mirror the manner in which transactions are handled in Spain in comparison to the handling of real estate transactions in the USA.
Through this video, #1 in a series of 4, lawyer and notary public Santiago F. Lampón introduces the issue of property taxes in connection to a real estate transaction under Puerto Rico Law. Through the other videos in the series, Mr. Lampón describes the various areas of concerns finalizing with a description on how to diminish the potential liability.
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