The Functions of an Escrow

Buying or selling a home (or other piece of real property) usually involves the transfer of large sums of money. It is imperative that the transfer of these funds and related documents from one party to another be handled in a neutral, secure and knowledgeable manner. For the protection of buyer, seller and lender, the escrow process was developed. As a buyer or seller, you want to be certain all conditions of sale have been met before property and money change hands. The technical definition of an escrow is a transaction where one party engaged in the sale, transfer or lease of real or personal property with another person delivers a written instrument, money or other items of value to a neutral third person, called an escrow agent or escrow holder. This third person holds the money or items for disbursement upon the happening of a specified event or the performance of a specified condition. Simply stated, the escrow holder impartially carries out the written instructions given by the principals. This includes receiving funds and documents necessary to comply with those instructions, completing or obtaining required forms and handling final delivery of all items to the proper parties upon the successful completion of the escrow. The escrow must be provided with the necessary information to close the transaction. This may include loan documents, tax statements, fire and other insurance policies, title insurance policies, terms of sale and any seller-assisted financing, and requests for payment for various services to be paid out of escrow funds. If the transaction is dependent on arranging new financing, it is the buyer’s or the buyer’s agent’s responsibility to make the necessary arrangements. Documentation of the new loan agreement must be in the hands of the escrow holder before the transfer of property can take place. A real estate agent can help identify appropriate lending institutions. When all the instructions in the escrow have been carried out, the closing can take place. At this time, all outstanding funds are collected and fees- such as title insurance premiums, real estate commissions, termite inspection charges- are paid. Title to the property is then transferred under the terms of the escrow instructions and appropriate title insurance is issued. Payment of funds at the close of escrow should be in the form acceptable to the escrow, since out-of-town and personal checks can cause days of delay in processing the transaction. The following items represent a typical list of what an escrow holder does and does not do: THE ESCROW HOLDER: serves as the neutral “stakeholder” and the communications link to all parties in the transaction; prepares escrow instructions; requests a preliminary title search to determine the present condition of title to the property; requests a beneficiary’s statement if debt or obligation is to be taken over by the buyer; complies with lender’s requirements, specified in the escrow agreement; receives purchase funds from the buyer; prepares or secures the deed or other documents related to escrow; prorates taxes, interest, insurance and rents according to instructions; secures releases of all contingencies or other conditions as imposed on any particular escrow; records deeds and any other documents as instructed; requests issuance of the title insurance policy; closes escrow when all the instructions of buyer and seller have been carried out; disburses funds as authorized by instructions, including charges for title insurance, recording fees, real estate commissions and loan payoffs; prepares final statements for the parties accounting for the disposition of all funds deposited in escrow (these are useful in the preparation of tax returns). THE ESCROW HOLDER DOES NOT: offer legal advice; negotiate the transaction; offer investment advice. Your local title company should be happy to provide additional information. Article by CLTA

Required Reporting to the I.R.S.

Sellers of real property will have certain information regarding the sale reported to the Internal Revenue Service. This required reporting is a consequence of the Tax Reform Act of 1986; it is intended to encourage taxpayer compliance and aid in audit and enforcement efforts by the I.R.S. To help you better understand this subject, the Land Title Association has answered some of the questions most commonly asked about Required Reporting to the I.R.S. Who is required to report to the I.R.S.? Sellers of real property, under guidelines established by the I.R.S., are required to have their gross proceeds from the sale reported on a Form 1099S. When a settlement agent is used, the I.R.S. makes this agent responsible for the delivery of the information on the Form 1099S. The settlement agent generally will be the escrow agent or title company; however, it may be an attorney, real estate broker or other person providing settlement services. What is an I.R.S. Form 1099S, and what will be reported? The Form 1099S is the reporting form adopted by the I.R.S. for submitting the information required by law. The information will be transferred onto magnetic media by the settlement agent who will store the information and make the required report to the I.R.S. The settlement agent is also responsible for keeping a master copy of all transactions reported. In general, information required by the I.R.S. falls into the following categories: The name, address and taxpayer ID number (social security or tax identification number) of the seller(s) A general description of the property (in most cases an address) The closing date of the transaction The gross proceeds of the transaction (even though gross proceeds do not correspond to taxable income) Any property involved as part of the transaction other than cash or cash equivalent The name, address and taxpayer identification number of the settlement agent. Real estate tax paid in advance that is allocable to the buyer. On what type of transactions is a Form 1099S required? Currently, typical homeowner transactions covered include sales and exchanges of 1-4 family residential properties such as houses, townhouses, and condominiums. Also reportable are sales or exchanges of improved or unimproved land, commercial or industrial buildings, condominiums, stock in a cooperative housing corporation and mobile homes (manufactured homes) affixed to real property. Specifically excluded from reporting are foreclosures and abandonment of real property and financing or refinancing of properties. What happens if the seller(s) refuses to provide the taxpayer identification number for the Form 1099S? The settlement agent is required to request the transferor’s taxpayer identification number(s) (TIN(s)) before the time of closing. You may request a TIN on Form W-9 or use an alternative written request. The IRS has included sample wording of an alternative written request in the instructions for preparation of Form 1099S. Should the seller fail to provide the identification number and certify its correctness, the settlement agent may choose to: Delay the closing of the transactions until the information is furnished, or Complete the transaction and report to the I.R.S. that an attempt was made to obtain the information from the seller. How is the sale reported when there is more than one seller involved or when multiple sellers do not own equal interests in the property? Multiple sellers may allocate the gross proceeds among themselves for purposes of reporting. If there is no allocation, an incomplete allocation or conflicting allocations, then the entire gross proceeds will be reported for each seller. Where can I go for further information on taxation of real property? The I.R.S. provides free publications that explain the tax aspects of real estate transactions. You may wish to order: Publication #523 “Tax Information on Selling Your Home” Publication #530 “Tax Information for Home Owners” Publication #544 “Sales and Other Dispositions of Assets” Publication #551 “Basis of Assets”   To place your order, phone toll-free (800) 829-3676. Article by CLTA