Archive for December, 2010

Out here in rural Minnesota, we like to do business the old-fashioned way–with a handshake.  Even in my law practice, I often feel strange asking someone to sign a retainer agreement before I start working on their issues.  So it’s no surprise that many contractors and building tradespeople fail to adequately protect themselves with a written contract and proper notices.

I’m sure every general contractor, subcontractor, and other skilled tradesperson can name off several past clients who have halted work, disagreed with a bill, or just plain didn’t want to pay.  You have probably heard about mechanic’s liens but may not know much about how they work.  We’ll cover that in a later topic.  For now, I want to remind you to protect your lien rights by including a pre-lien notice in your written contract.

Minnesota Statute 514.011 requires contractors to give owners a pre-lien notice at the time the contract is entered into.  If you don’t, you lose the right to ask for a lien.  The law is very specific about the wording and format of the notice:

“The notice, whether included in a written contract or separately given, must be in at least 10-point
bold type, if printed, or in capital letters, if typewritten and must state as follows:
“(a) Any person or company supplying labor or materials for this improvement to your
property may file a lien against your property if that person or company is not paid for the
contributions.
(b) Under Minnesota law, you have the right to pay persons who supplied labor or materials
for this improvement directly and deduct this amount from our contract price, or withhold the
amounts due them from us until 120 days after completion of the improvement unless we give
you a lien waiver signed by persons who supplied any labor or material for the improvement
and who gave you timely notice.”

While courts have awarded mechanic’s liens in some cases where the notice did not comply with the law but the contractor made a good faith effort to comply with the law, it’s a good idea to put the notice language right in your contract in the right size and font.  In other cases, lien rights have been lost because the notice was not in large enough font, was not in bold, or failed to include required language.

The notice requirement is detailed and varies depending upon the type of contractor you are and how you communicate with the owner.  For specific guidance, please contact my law office.

If you’ve ever purchased or sold a house, an acreage, or real property of any kind, you know that you will sit down with a notary and sign until your hand hurts. And for all you know, you could be signing away your life or your firstborn child, as quickly as you end up signing most of those documents. If you have a lawyer in the room with you, he or she should explain what you are signing, but it’s still possible that you will stop listening after document number 5,451 and nod as though you really do understand and care.

As a seller, though, you should be aware that some of the documents you sign may have consequences next April when your taxes come due. The IRS requires closing agents to report on the sale of real estate in case you owe any taxes on gains from the sale. Your closing agent, who may be a lawyer, a title company representative, or someone else, is required to submit IRS Form 1099-S to report the sale or exchange of real estate.

According to the IRS, sales of the following must be reported for income tax purposes:

• Improved or unimproved land, including air space;
• Inherently permanent structure, including any residential, commercial, or industrial building
• A condominium unit and its appurtenant fixtures and common elements, including land; and
• Stock in a cooperative housing corporation (as defined in section 216)

Many home sales, however, are exempt from reporting. Pay attention to these guidelines, because a legal exemption will save you as a homeowner from having to pay taxes on the sale of your home. To be eligible for exemption from the 1099-S filing requirements, you must submit an acceptable written assurance (certification) to the closing agent responsible for filing the 1099-S (often the buyer’s attorney). Your attorney or closing agent should provide you with a form certification to avoid the 1099-S filing requirements if you are eligible.

The IRS gives examples of a sample certification in Revenue Procedure 2007-12, 2007-4 I.R.B. 354. Among other factors, you will need to certify that

• You owned and used the residence as your principal residence for periods aggregating 2 years or more during the 5-year period ending on the date of the sale or exchange of the residence.
• You have not sold or exchanged another principal residence during the 2-year period ending on the date of the sale or exchange of the residence.
• You (or your spouse or former spouse, if you were married at any time during the period beginning after May 6, 1997, and ending today) have not used any portion of the residence for business or rental purposes after May 6, 1997.
• At least one of the following three statements applies:
  • The sale or exchange is of the entire residence for $250,000 or less.
  • OR
  • You are married, the sale or exchange is of the entire residence for $500,000 or less, and the gain on the sale or exchange of the entire residence is $250,000 or less.
  • OR
  • You are married, the sale or exchange is of the entire residence for $500,000 or less, and (a) you intend to file a joint return for the year of the sale or exchange, (b) your spouse also used the residence as his or her principal residence for periods aggregating 2 years or more during the 5-year period ending on the date of the sale or exchange of the residence, and (c) your spouse also has not sold or exchanged another principal residence during the 2-year period ending on the date of the sale or exchange of the principal residence.
• During the 5-year period ending on the date of the sale or exchange of the residence, you did not acquire the residence in an exchange to which section 1031 of the Internal Revenue Code applied.