DEAR BENNY: My 42-year-old son will move home next month. I am 65 and thinking of downsizing. I would like to place him on the deed when he moves in and after two years, sell my home. Since he is on the deed, will up to $500,000 be tax exempt? I know that there could be problems with this arrangement. Is this possible and what are the drawbacks with this arrangement? –Richard
DEAR RICHARD: First, what do you mean that you will "place him on the deed"? Will you be selling the house to him, or just adding his name to the deed? If the latter, there are potential tax complications. This would be treated as a gift. The law is quite clear that the tax basis of the person giving the gift (the giftor) becomes the tax basis of the person receiving the gift (giftee).
For example, let’s say you bought the house many years ago for $100,000 and now it is worth $500,000. Your tax basis is $100,000, excluding any improvements that you may have made along the way. If you give half of the house to your son, his basis becomes $50,000. If you then immediately sell it for $500,000, your profit is $200,000 (half of $500,000 less your basis). If you have owned and lived in the house for at least two years, you can exclude the entire gain and pay no tax. But your son did not live in the house for two years. His profit is also $200,000, but he would have to pay the IRS $30,000 (based on the current 15 percent capital gains tax rate) plus any applicable state or local tax.
Now let’s look at a sale after both you and your son have owned and lived in the house for two out of the five years before sale. You sell it for $600,000. The tax basis for each of you is $50,000. You have thus made a profit of $250,000 each. In this scenario, both of you can claim the $250,000 exclusion of gain and pay no tax.
You have raised an interesting plan, but do the numbers before taking any action.
DEAR BENNY: First and foremost I am happy to see someone who addresses both sides of the tenant-landlord relationship. We entered into an agreement with a property owner and her property management company to rent a home in Arizona for a term of nine months. We are presently in the third month of our lease and the other day I received a phone call from the property owner asking if I had paid rent for September. Because there is a property manager, I was taken aback by the question, but told her the property manager received and cashed the rent well before the due date.
The property owner told tell me that she hadn’t received the rent and when she attempted to contact the property manager she was met with a message stating, "We are no longer in operation due to financial difficulty. We’re sorry and thank you." I verified this information shortly after speaking with her. Immediately my concern escalated to our security deposit of almost $2,000, as both rent and security were paid to the manager. I called the owner to ask her where the security deposit had been placed for custody and she indicated that it was with the property manager. The manager has disappeared, not forwarded the rent for September, and also has not had any contact with the property owner. The owner indicated she had nothing to do with the deposit and that she assumes it was stolen by the property manager along with her rent for September. She proceeded to tell me how she’s in a default position on her mortgage and will be forced to short-sale the property. She insists she is not liable for the security deposit. The owner also insists that my lease agreement was with the manager and not her, something very concerning because she is a licensed real estate agent in the state. She should know better and be well aware the manager was acting in an agent capacity on her behalf.
I’ve since discovered the property manager was not licensed or associated with a broker to conduct real estate business in the state. The agreement was signed by me and the manager in her presence with acceptable terms on all sides. This has become a very stressful situation and I don’t want to end up in litigation, but I also don’t want to send rent to someone who is blatantly being ignorant of the law. The owner refuses to consult an attorney because she is "broke" due to the slumping housing market and has drained her savings. Do you have any words of wisdom about what to do here? –J.T.
DEAR J.T.: Although I do not practice law in Arizona, I believe that the lease — although signed by the manager — is binding on the property owner. The manager held herself out as an "agent" for the owner, and the owner bears the risk.
But that’s the easy part. If the owner is in financial trouble, the home may be sold at a foreclosure sale (or at a short sale). Depending on the laws in Arizona, you may not be able to remain a tenant. In the District of Columbia where I practice law, your tenant rights would be protected against anyone who bought at a foreclosure sale. And the general rule of law is that anyone who buys a house where there is a valid lease takes subject to that lease. In other words, you would have the right to remain in the property for the remainder of your lease term.
I would sit down with the owner and try to work out an acceptable solution. Perhaps you can start paying future rent directly to the owner, so that the house can be salvaged. Perhaps you might be interested in buying the house, and can use your rent payments as a down payment. I suspect, however, that the landlord will lose the September rent that you paid and that you will lose your security deposit. Both of you can, of course, file suit against the property manager, but that may be a useless effort if there is no money. You can also consider pursuing criminal action against the property manager.
DEAR BENNY: I used a Realtor to purchase my home 10 years ago. She represented me as a buyer’s agent. I liked her very much and plan to use her again in the near future when I decide to purchase a new one. The Realtor, Sally, recently listed a house that I am interested in. The house went off the market for a short period of time and has reappeared with a new listing agent. Is it legal and ethical to hire Sally as a buyer’s agent and have her provide me with information on the home I am interested in? Are there any limits as to what she can/cannot tell me about this property and owner’s situation? –Eileen
DEAR EILEEN: So long as the property owner now has a new real estate broker, it is acceptable for you to use the other broker as your "buyer’s agent." She can discuss everything with you except any personal financial information she may have obtained during the time she represented the seller.
However, I am not a big fan of the "buyer broker" concept. Why not consider asking the agent to assist you, but she can be the "selling agent." In other words, she will continue to be an agent of the seller but will help you in drafting the real estate contract.
This is the way real estate used to be sold. A seller listed the property with a "listing agent" and other agents brought potential buyers to the property. When a contract was finally entered into, the agent who presented that buyer was known as the "selling agent."
My concern about the "buyer broker" concept is that there is always the concern that the agent — having learned information from the buyer (such as how much the buyer is prepared to pay for a house) — may telegraph that information to the seller (or the seller’s agent), so as to earn the commission. This is not a broad-brush attack against agents (and I know I will get a number of complaints from brokers), but many buyers over the years have had these kinds of problems.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.
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