CLAIMS AGAINST REAL ESTATE AGENTS ARE UP!!

According to one of the largest insurers representing the real estate industry, claims against real estate agents are up.    " ...a number of factors are contributing to this trend, including:

1. Collapse of the Sub Prime market
2. An increase in the stock market as investment dollars shifting from real estate to equity investments
3. Increased interest rates
4. Increase in foreclosure rates, both personal and corporate
5. Stall of the residential real estate sales in major US Markets
6. A slowdown in the growth of increased rents"

Some of the more significant areas of claims are in the following areas:

1.      "Mortgage Brokers.  These claims relate to suitability.  Allegations contend that such mortgages should have not been issued given the financial creditworthiness and ability of the borrower to repay the loans.  When the borrower cannot repay loans, suits arise from the borrower, lender and others. These claims relate both to residential and commercial...
2. Commercial Real Estate Agents.   These claims relate to practically every area of a real estate transaction.  In several instances...the broker was sued because a property failed to achieve a sales or rental price consistent with expectations. Some of the more frequent claims involve the following:

• Suitability of purpose claims.  These claims can relate to improper zoning, easements or ADA related issues.  In these cases, a property cannot be used for its intended purpose.  This is a significant risk in land sales...
• Discrimination.  These claims involve both residential and commercial clients. These claims frequently relate to property management or dual agency claims...
• Dual Agency.  These claims can occur in any real estate transaction where dual agency is involved. Dual agency refers not only to the same agent, but also the same Firm with different agents."
• Commissions. Many of the real estate brokers bring suit against their clients in order to collect commissions owed. In most cases this results in countersuits of negligence. 
• Corporate Services. In many cases the real estate agent steps out of the box as a real estate agent and performs nontraditional consulting services.  This sometimes results in the real estate agent performing related services that they are not qualified to perform. Result:  Lawsuits for negligence and malpractice.
• Pollution. Many brokers are brought into lawsuits relating to the "...failure to disclose a contaminant which may include lead, asbestos, mold, etc. These claims typically involve failure to disclose by an owner which is imputed upon their agent." 
• Buyer/Lesser Financial Creditworthiness. "These claims relate to the inability of a tenant or buyer to fulfill their financial obligations as a buyer or tenant.  The claims address the issue of whether the broker has a responsibility to properly qualify a buyer or tenant and what obligation they have to disclose such information."

CONCLUSION:  Claims on the above referenced lawsuits ranged from $250,000 to $25 million.  We are experiencing a  major slow down in residential sales ( I predicted this more than  18 months ago--go to  our Jan 2006 blog section)  with a less distressed slow down in commercial sales.    When times get harder, the number of lawsuits rise.

WHAT CLOSING COSTS CAN BE PAID OUT OF CLOSING PROCEEDS AND NOT BE IN VIOLATION OF SECTION 1031?

As a real estate attorney for more than 35 years, I have been asked this question numerous times.  Now that I head up a very large Qualified Intermediary Company, I see the above question on my e-mail at least once a month.  So let's answer the question.  Revenue Ruling 72-456 addressed the issue of real estate commissions saying, they are valid deductions from the proceeds and will not have the effect of being taxed to the taxpayer.  But what about some of the other costs associated with a real estate closing? 

IRS has taken the position that the following "nonrecurring" costs of the sale or purchase in a Section 1031 exchange are valid expenses:  Real Estate Commissions; Recording Fees; Title Insurance premiums, Legal Fees; Documentary Transfer Taxes (Fees); Agreed property inspections; and closing agent (escrow agent) fees. So you can use the proceeds from the Section 1031 exchange toward payment of these costs and will not be taxed on those dollars spent.   But what about the costs associated with the obtaining of a loan (mortgage or deed of trust)?   Unfortunately, they are not allowable deductions for Section 1031 purposes. 

The bad news is that loan points, loan fees, and other related loan expenses are not  deductible items from the exchange proceeds.  In other words, when it comes to loan costs,  IRS has taken the position that the use of 1031 proceeds for loan costs will be taxable to the taxpayer.

1031 EXCHANGING A LEASEHOLD INTEREST FOR A FEE INTEREST

About once a month I get a call from a CPA or Tax Attorney asking whether a tenant who has a long term lease, can exchange that lease for a fee (complete ownership of the real estate) interest in another piece of real estate.  As far back as 1951, the Courts determined that a lease with 30 or more years remaining to run, can be considered "like kind" to other real estate for exchange purposes.  Further, Treasury Regulation Section 1.1031(a)-1(c) specifically spelled out this wonderful opportunity.  But note, the lease more have at least 30 or more years to run and any options to renew can be included in the 30 years.   There are a couple of states that have determined that a 20 year lease is an interest in real estate and in those states you might be able to exchange a 20 year lease for another type of real estate.  Additionally, a landlord/owner could exchange his interests in the property for another type of real estate; of course he would be exchanging a piece of property which is subject to the lease, but it still would qualify for an exchange.

BE NICE

A retired Real Estate Broker acquaintance of mine, Joe Klock, Sr., recently wrote a column on how the world would be a better place if we...Well let me just quote a portion of the article and see if you agree with both Joe and I that we should just try to be nice to others.  "Modern mores have shoved niceness aside in favor of individualism, aloofness, discourtesy, hurriedness and unconcern for others.  While, as individuals, we are powerless to remedy the greed, prejudice, anger, injustice and cruelty that has become so pervasive on the worldwide stage, it is arguable that random acts of kindness could be a helpful form of global warming."  Want some examples of things we all can do?  "...Let some with a lighter order move ahead of you in the checkout line; Yield the right of way to another driver for no good reason; Compliment a total stranger on his or her appearance; Favor everyone you meet everywhere you go with a brief greeting and a big smile;  Wave to neighbors you don't really know; Send at least one note or e-mail each day to a long-ago acquaintance with whom you've been out of touch. ("Just thinking of you" will do for the message)."   

Want some more ideas:  "...Write a nice note to the table server when you sign you credit card slip; Remove the shopping cart that blocks a parking spot at the mall; Help a  co-worker with an unpleasant chore; Concede a minor point to another person, if it will make them feel better; Say "please" and "thank you" at every possible opportunity; and turn off the TV and just listen to one of your kids for a half-hour."  I think one of the final points  is:  "Do at least one nice and unnecessary thing every day - preferably something for which you'll get no credit and of which you're unlikely to know the results."  In other words,  let's all be nicer to each other.  I promise the next blog will be on a 1031 item.

WHEN IS A PIECE OF RAW LAND THE SAME AS THE EMPIRE STATE BUILDING?

The answer is:   when a taxpayer does a Section 1031 tax deferred exchange.  One of the most important rules in a Section 1031 exchange states that the relinquished property (that's the property you are selling) must be "like kind" with the replenished or replacement property (that's the property you are purchasing). 

When it comes to a real estate exchange, all real property is "like kind" to any and all other types of real estate.    That means that a piece of raw land can be exchanged for an existing building.   You can exchange a shopping center for a single family rental.  In other words, any type of real estate can be exchanged for any other type of real estate.  Now you bloggers can understand why I love to do real estate exchanges--generally, they are a lot simpler than doing a personal property exchange, which must be a lot more specific--but that's a topic for another blog.  For a more thorough understanding of 1031 exchanges, go to our website:   www.bayview1031.com

DEATH AND SECTION 1031

Recently, one of my EC's (Exchange Coordinators) came in with the following situation.  Our client, the taxpayer sold the investment property and did a Section 1031 exchange with us (Bayview Financial Exchange Services).  The proper documents,along with the appropriate funds, were sent to us as the Qualified Intermediary.  Nine (9) days after the transaction closed, the client (taxpayer) died of a heart attack.   What happens now ? --Was the question from his lawyer.   

The Taxpayer's estate can continue with the exchange--meaning that they can identify  replacement property (ies) they wish to purchase, within the 45 days from sale of the relinquished property.   This allows the estate to continue with the Section 1031 tax deferred exchange.   OR,  the estate can delete the property they or the decedent had identified within the 45 day identification period.  In that case, after the 45 day identification period has expired, the estate would then have to pay taxes, because they had not completed a tax deferred exchange. 

A little complicated issue--If you have a complicated case, just give us a call toll free at:  866-903-1031 and one of our 6 CES representatives will be happy to get you the answer.

CAN THE GOODWILL OF A BUSINESS BE EXCHANGED?

NO.  Now wasn't that a simple answer.   

Here's whey:   IRS in Reg Section 1.1031(a)-3(c)(2) states that the goodwill of a business or going concern is never "like kind" to the goodwill of another business.   The reason IRS gives is that each business or going concern value is so inherently unique and inseparable from the business.   So what does all of this mean?  You can't do an exchange of business goodwill.  You can exchange the assets for the same type of assets, example:  chairs for chairs, auto's for auto's, but not the goodwill of the business.  If you were to call our office, I would be recommending to you that before you sign your contract of sale, that you allocate the lowest amount you can toward the goodwill of the business, so that you can allocate the rest of the sales price to items that you can exchange. 

FYI--You can have a tax deferred exchange on customer lists, franchise rights, licenses, permits and the value of leasehold interests.   But again, when it comes to personal property, they must be exactly the same, in other words, customer lists for customer lists, franchise rights for franchise rights, etc. 

PROVOCATIVE THINKING--SOME FOOD FOR THOUGHT

Ed Bernacki, a speaker I have heard a couple of times, wrote an article in the June 2007 issue of Bright magazine about creative thinking.  Let me quote him:  "They say that drastic times call for drastic measures.  When it rains, it really does pour.  One problem after another.  Your back is against the wall...It would be impossible to fit more cliches into one paragraph (although it might be fun to try).  But the cliches are indicative of the problem I wish to address:  Why do so many businesses wait for drastic times, work under the gun, and find themselves between a rock and a hard place before taking drastic measures?"   A lot of businesses to not wait for things to "happen".  Creative, or has he says "provocative" thinking is a process used by many to solve their projected problems.  Let me give you some methods used in creative (provocative) thinking.  "Recognize today's assumptions and question them.  Change the way things are done.  Cut through unnecessary complexity and simplify.  Don't be satisfied with the status quo.  Listen to other points of view.  Look for alternatives.   Look beyond the obvious.  Do not be satisfied with the adequate and the mediocre.  Stimulate new ideas."  Remember my old saying:  "Problems are opportunities in disguise."  Become a problem solver--think proactively.  I promise the next blog will be a 1031 subject, but when I read Bernakci's article, thought you bloggers would enjoy reading about Provocative Thinking.

WHY SHOULD I USE A QUALIFIED INTERMEDIARY(QI)?

I get asked that question hundreds of times a month.    At Bayview Financial Exchange Services (BFES) we handle thousands of tax deferred exchanges a year and are aware that once a taxpayer has actual or constructive receipt of the proceeds from the sale of the relinquished property (i.e. direct or indirect use or control of the proceeds) the exchange becomes invalid.  So why should I use a QI like BFES?  Because the use of a QI is a "safe harbor" that was established in the Treasury Regulations, which help interpret the IRS Code.  If the "safe harbor" requirements are met by the taxpayer, then IRS will not consider the taxpayer to be in actual or constructive receipt of the funds.   So in the typical 1031 transaction, the proceeds from the sale of the relinquished property go directly to the QI, who holds the funds until they are needed for the purchase of the replacement property.  The QI delivers the funds to the Closing Agent on the replacement property transaction and the tax deferred exchange process is completed.  Nice, easy and if you have hired the right QI, the process becomes very simple.