 |
What is title insurance and why do you need it? On this page, we've listed the answers to these and other commonly asked questions.
We suggest that you read through this information to better understand the value of title insurance in protecting your homeownership. And the general real estate information will help make the home-buying process a smoother one.
Please contact us if you have additional questions or would like more detailed information about any of the FAQs below.
What is a title?
When you purchase a home, you are really purchasing the title to the property – which is the right to occupy and use the space. That title may be contested based upon past rights and claims asserted by others. These types of claims can infringe upon your purchase of the property or cause you to lose money.
What is title insurance?
Title insurance is an insurance policy that protects the homeowner against future loss should the title condition be any different than when the policy was written.
Why do you need title insurance?
A home is usually the largest single investment any of us will ever make. Title insurance protects against loss of value from hazards and defects that may exist in the title. These hazards include fraud, forged signatures on deeds, unknown property heirs, liens, and documentation errors. If you were uninsured and your right to title is challenged, you could lose significant money defending yourself or you could lose your home. Your mortgage lender will require a loan policy of title insurance to protect their interest in the value of your property and a homeowner should purchase an owner’s policy for the very same reason.
How does title insurance differ from other types of insurance?
Most insurance policies protect against losses arising out of possible future events. The primary purpose of title insurance is to prevent losses from defects in title arising out of past events.
Is a homeowner required to have title insurance?
Yes and no. While the lender will likely require a loan policy of title insurance, the purchaser can choose what type of owner’s protection, if any, to use with regard to their title. However, without an owner’s policy, the homeowner will not be protected against hidden hazards or reimbursed for legal expenses for defense or claims that affect the value of the property.
How does title insurance protect against hazards?
An owner’s policy of title insurance requires the insurance provider to pay for defending against any lawsuit attacking your title as insured, and will either clear up title problems or pay the insured's losses. For a one-time premium generally paid at closing, an owner’s title insurance policy remains in effect as long as you, or your heirs, retain an interest in the property.
Why does your lender require title insurance during refinancing?
From the lender’s standpoint, a refinanced mortgage is actually a brand new mortgage – complete with the same risks that may have been present originally. During the refinance process, your original mortgage is paid off – and your existing lender’s title insurance policy is rendered null and void. However, if you purchased an owner’s policy of title insurance at your original closing – that policy will remain in effect as long as you or your heirs own the property.
How much does title insurance cost?
Probably less than you think. Charges vary in different sections of the country, but generally the cost of title insurance (including the search, examination and related services) amounts to about one percent, or less, of the cost of the property. And unlike other insurance premiums, which must be paid annually, a title insurance premium is paid one time only, usually at settlement.
What is the difference between title insurance and homeowners’ insurance?
Homeowner’s insurance typically provides protection against theft, accidental damage, or natural disaster. While these types of loss can certainly be substantial, losses from a defective title could be devastating. A home destroyed by fire can be rebuilt; but if the title to the land fails, without title insurance the homeowner could lose the right to inhabit the house as well as the land it occupies.
How long does title insurance coverage last?
The lender’s policy of title insurance lasts until the mortgage is paid in full. The owner’s policy of title insurance lasts for as long as the homeowner or their heirs retain an interest in the property. Unlike other types of insurance, a title policy never goes out of effect. Even though the insured sells the property and goes out of title, the policy insuring him still is in effect via the deed he conveys the property with.
Who is protected by the different types of title insurance?
Only the lender is covered by the Mortgagee’s Title Policy; both the buyer and the seller are protected by the Owner’s Title Policy.
How does title insurance protect a homeowner’s heirs?
A title insurance policy provides coverage from the time of its effective date back to the origin of the title. After the property has passed to a homeowner’s heirs, if any defect prior to the policy should arise, the title insurance company would defend the title for the heirs as it would for the homeowner.
Are there any general exceptions to what is covered in a title policy?
Yes. Easements, deed restrictions, zoning requirements, mortgage liens, and certain other categories of limitations on the use of property are specifically exempted, or otherwise not covered. Consult with your title insurance agent for full information on policy exemptions.
Where can a title insurance policy be obtained?
A homebuyer can obtain title insurance from any licensed title insurance company. When choosing a title insurer, it is important to look for a company with expertise and experience, as well as the financial strength to provide protection should a claim arise. A real estate broker or attorney can recommend such a company.
What is a title search?
A title search is a detailed examination of a property’s historical records, such as deeds, court records, and many other documents. The purpose of the search is to verify the seller’s right to transfer ownership, and to discover any claims, defects, and other rights or burdens on the property.
What kinds of problems can a title search reveal?
A title search can show title defects and liens, as well as other encumbrances and restrictions, including any unpaid taxes, unsatisfied mortgages, judgments against the seller and restrictions limiting the use of the land.
The current property owner already has title insurance. Why do I need another title search?
A title policy insuring the seller does not protect the buyer. Also, many things could have happened to the land since that owner’s policy was issued. Your seller could have a mortgage, a home equity loan, judgments, or unpaid taxes that would not be covered in the seller’s title policy.
What is a title defect or encumbrance?
A title defect occurs when information is missing from a title, such as the existence of a previous owner’s undisclosed heir who could then make a claim on the land. An encumbrance is a claim made upon the land by a party other than the landowner. For instance, a local utility company may have an easement for utilities run to a house. When a potential homeowner is borrowing money, the lender will require the title to be cleared of any outstanding defects or encumbrances before the land is transferred and the loan approved.
What is a title opinion?
A title opinion is the judgment of a trained professional - often an attorney - based on a search of public records. A title opinion only protects against loss related to oversight on behalf of the individual making the opinion, not against hidden hazards.
Why is transferring the title to real estate different from transferring the title to other items, such as a car?
Since various rights to the land (such as mineral, air or utility rights) may have been acquired by others, it is necessary to determine whether any rights are outstanding in order to ensure transfer of a clear title.
Back To Top
What is a closing?
Closing, which is also known as “settlement” or “escrow,” is the event where the title to a property is transferred from seller to buyer. Closing is typically held in an office, such as that of an attorney, title agent or title insurance company, and involves the completion of all the necessary paperwork to finalize the agreement between buyer and seller. In addition, all financial issues are settled at closing – closing costs – and once the title is successfully transferred, the necessary documents are prepared, signed, and filed with local authorities.
What are closing costs?
Closing costs are all costs required to close the real estate transaction. They can include (but are not limited to) surveying fees, property taxes, title insurance, attorney fees, agent fees, points, loan origination fees, primary mortgage insurance (PMI), and the balance of your down payment. Prior to closing, you should review your final closing statement or HUD-1 Statement (whichever is in use) to ensure that all the calculations are correct and that you have been given all the credit for deposits and other agreed upon buyer and seller credits. Also recheck all lender, title, and escrow fees to make sure they are accurate.
What is escrow?
Escrow enables the buyer and the seller to transact business with each other through a neutral party, thereby minimizing their risk. In the escrow, all parties involved give their instructions to the neutral intermediary, the "escrow holder," who ensures that no funds or property change hands until all instructions have been carried to completion.
Why do I need escrow?
Whether you are the buyer or the seller, you want assurance that no funds or property will change hands until all of your instructions have been followed. With the increasing complexity of business, law and tax structures, it takes a trained professional to supervise the transaction.
Who chooses the escrow?
The selection of the escrow holder is normally done on the agreement between principals in accordance with contract purchase agreement between said principals.
Who can handle an escrow?
The escrow holder may be any disinterested third party, although some states require that certain escrow holders be licensed. Escrow officers with established firms generally are experienced and trained in real estate procedures, title insurance, taxes, deeds and insurance.
What are escrow instructions?
The escrow instructions are written documents, signed by the parties giving them, which direct the escrow officer in the specific steps to be completed so the escrow can be closed. Since the escrow holder can only follow the instructions as stated, it is extremely important the escrow instructions be worded carefully and clearly so that no one will have difficulty construing them at a later date.
What are the types of escrows?
- Residential: single family/condominium/1-4 multi-family
- Commercial: retail/industrial/office/hotels
- Subdivision: tracts/condo conversions
- Apartment building (over four units)
- Leasehold
Also: sale of notes and trust deeds, new loans, sub-escrows, tax deferred exchanges and business opportunities.
Back To Top
Is the role of the Qualified Intermediary (QI) really necessary?
As QI, LandAmerica 1031 provides many necessary and helpful functions during the exchange. If our role were narrowed down to the absolute necessary elements they would number only two:
- Provide the taxpayer with the required paperwork (Exchange Agreement for simulateneous, deferred, and to-be-built exchanges, and Qualified Exchange Accommodation Agreement for reverse and reverse construction exchanges) to establish the taxpayer’s intent to do an exchange, to create the structure of an exchange, and to make sure the end result complies with the laws and rulings.
- Act as the accommodator and have all proceeds redirected to LandAmerica 1031 to protect the taxpayer from actual (direct) or constructive (indirect) receipt of those funds, either of which would invalidate the exchange.
Other important functions are our ability to provide 100% security for all funds we hold, maintain updated documents to reflect changes in the law, answer complex questions, provide creative solutions, be aailable on short notice to produce the necessary documents, keep our customers informed on the status of various time frames, and generally provide any and all customer services when needed.
Is a QI necessary in a simultaneous exchange where all deeds and proceeds are transferred within minutes of each other?
What is needed in all exchange structures (except a two-party direct swap) is for a party to the transaction, other than the taxpayer, to receive the cash proceeds from the transfer of the taxpayer’s relinquished property. Before the advent of QIs, this person was either the buyer of the taxpayer’s relinquished property or the seller of the replacement property. This person was called the “accommodating grantor” or, simply, the “accommodator.” Today, the accommodator is an additional party in the transaction referred to as a Qualified Intermediary. LandAmerica 1031 Exchange Services is such a Qualified Intermediary.
Why has the government allowed tax-deferred exchanges to exist since 1921?
A widely held opinion is that the government makes more money with tax deferral than without it. Tax deferral is an economic stimulus which encourages property sales and purchases. These sales and purchases directly provide millions of jobs. In addition, these millions of people employ others through their spending. The end result is that the government collects more income tax. The absence of tax deferral would cause most investors to hold on to their properties and not sell them. No real estate sales, no related employment. No employment, no spending and no income tax collected. Congress discovered soon after the implementation of our income tax code in 1913 that various types of tax deferrals were necessary exceptions.
Can related parties do exchanges with each other?
Yes. It is a complex issue, however, that deserves further explanation and may change with future rulings. If this issue is important to you, please contact a LandAmerica 1031 office for more information on related party exchanges and contact a knowledgeable tax advisor before proceeding.
Is an exchange sometimes not appropriate?
Yes. An exchange is inappropriate when:- The taxpayer has a capital loss.
- The taxpayer does not want like kind property.
- The taxpayer wants a higher depreciable basis in the replacement property.
- The taxpayer wants a substantial amount of cash (classified as “boot”). Receiving boot is generally a taxable event but does not necessarily disallow the exchange. However, once the amount of tax on the boot received equals or exceeds the amount of tax on the realized gains, there is no advantage to the exchange.
Can real estate be exchanged for anything other than real estate?
No. However, all real estate can be exchanged for all other real estate except:- Real estate held as a primary residence or for personal use.
- Real estate held primarily for sale or as inventory.
- U.S. real estate for foreign real estate, or vice versa.
- Real estate not identified or acquired within the time frames provided for in the Code.
- Real estate exchanged between related parties who do not meet the strict rules regarding such exchanges.
Do second homes qualify for exchanges?
Yes, as long as the primary purpose for the second home is not for personal use. For example, let?s say the taxpayer personally uses the property one or two weeks a year but then the property is rented much of the rest of the year. Excluding the percentage of the year the property is used personally, this property could, in fact, be exchanged. How much personal use will disqualify the property is uncertain. If you are contemplating such an exchange, we strongly urge you to contact a knowledgeable tax advisor before proceeding.
Do real property leases qualify for Section 1031 exchanges?
Yes. The requirement is that leases must have 30 years remaining at the time of the exchange to qualify as like kind property to real estate. Unexercised options to renew can be included in the 30-year calculation.
Is the taxpayer required to acquire the replacement property with the same name as was on the relinquished property?
Generally, yes. This was firmly established in Starker vs. U.S. 602 F.2d 1341 (1979). In that case T.J. Starker had one replacement property deeded to his daughter and another acquired by way of an option to purchase. An option is personal property and not like kind to real estate. Both properties were disallowed as not being like kind property. The only exceptions involve single-member limited liability corporations and grantor trusts.
Can a taxpayer do an exchange if the lender is given the deed in lieu of foreclosure?
Theoretically, yes. It is still likely that there is a taxable capital gain and depreciation recapture even if there is no remaining equity. There are several complexities to consider:- Can the lender somehow prevent an exchange from occurring?
- Will the investor have other moneys in which to acquire replacement property?
- Will the IRS consider this to be a short sale?
Are partnerships allowed to do exchanges?
Yes. All tax-paying entities are entitled to the benefits of Section 1031.
Can the individual partners do an exchange?
No. The Code is clear that “This subsection shall not apply to any exchange of...interests in a partnership.” IRC (Section 1031 (a)(2)(D)). There are no definitive rulings that sanction the use of creative structures that circumvent the Code. If you are contemplating such a type of structure, we strongly urge you to seek the advice of a knowledgeable tax advisor before proceeding.
What are the tax considerations if the taxpayer carries financing for the buyer?
An exchange can be structured so the taxpayer either receives the note and incurs a tax liability or has LandAmerica 1031 receive the note from the buyer with no tax liability to the taxpayer. Below is an overview of the various structures regarding notes. Because of the complexities in these structures, you must obtain the advice of a knowledgeable tax advisor before deciding on which structure to use.- Taxpayer receives note. The note is considered boot and is taxable. The taxpayer may elect to pay the gain on the note in his or her next tax filing or not to make such election and to receive Installment Sale treatment.
- Taxpayer has note (and all payments) made payable to LandAmerica 1031. LandAmerica 1031 holds the note during the exchange period while the taxpayer attempts to use the note as consideration for the replacement property. If successful, the note is passed through to the replacement property owner and the taxpayer has no tax liability on the note.
- Taxpayer has note (and all payments) made payable to LandAmerica 1031. LandAmerica 1031 holds the note during the exchange period while the taxpayer attempts to use the note as consideration for the replacement property. If not successful, the note is received by the taxpayer at the end of the exchange and considered boot. The taxpayer may elect to pay the gain on the note in his or her next tax filing or not to make such election and to receive Installment Sale treatment.
- Taxpayer has note (and all payments) made payable to LandAmerica 1031. Taxpayer purchases the note from LandAmerica 1031. There should not be a tax on the note as cash boot added offsets cash boot received (the note).
- Taxpayer has note (and all payments) made payable to LandAmerica 1031. Taxpayer attempts to find a third-party buyer for the note while it is being held by LandAmerica 1031. If successful, the note is replaced with cash and the cash is added to the proceeds held by LandAmerica 1031 and used as consideration for the replacement property. If the note was sold at a discount, there may be taxes due on this discount.
Back To Top
|
