Law students all across America, when introduced to property law, are introduced to the mythical text book real estate referred to as “Blackacre.” Blackacre is the mythical dream property that travels through a parade of title issues and problems as it is sold and litigated over through hypothetical fact patterns on law school exams.
Selling real estate can be tricky. It is not always as simple as exchanging a deed for a payment. There are a lot of moving parts into a well executed real estate transaction. Some of them are surface level and basic, others of them not so much. Even if you do not intend on having an attorney handle the transaction the entire way through, there is considerable benefit to having an attorney help guide the transaction.
Here are the Top 3 reasons to consult with legal counsel, when selling real estate.
1. Capital gains taxes. It is extremely gratifying to help a client avoid or reduce the payment of capital gains taxes. It seems very simple, however it is often times overlooked, until the issue comes into my office. There are a number of tactics, some simple, some not-so-simple, to reduce capital gains taxes. If you are selling the property on your own without any professional guidance, a simple step may be missed. Depending on your income level, the easiest sale solution may be to set-up an installment sale. This is a transaction where you split the sale over a period of two or more years. By doing this, you are allocating the taxable gain over more tax years. Depending on your income level (consult CPA), your capital gains tax rate may be zero. However, if you dump all of the gain into one tax year, you may be eligible to give your money away to the government. It is an analysis that should be done before signing a purchase agreement, so that the seller can dictate the terms of the deal.
A more complicated alternative could be a 1031 exchange. This is where a seller sells the real estate, and then parks the money from the sale with an exchange intermediary. This allows the seller to then use those same sale proceeds to purchase a different property (replacement property). This strategy works if you are selling real estate for the purpose of purchasing other real estate. There are a lot of tricky rules and requirements, so legal counsel needs consulted from the get go. While there are some fees involved, it oftentimes pales in comparison to the taxes that would be paid on a straight sale.
Remember, the sale of a primary residence, under Section 121 of the Internal Revenue Code, is exempt from tax, so long as the specific rules of the section are met (sale price, years in the house, etc). If you are thinking you want to rent your home, and then later sell it for a profit–be careful. You may be converting it into a taxable property.
2. Lease issues. When a person sells real estate, they will have to sign a warranty deed. A warranty deed “warrants” the title. This warranty also includes the “warranty” that the buyer can have possession of the real estate. If you are selling a tract of land, and failed to give your tenant proper notice, your buyer may be in for a big surprise. The buyer of real estate takes real estate subject to any tenancy that is on the property, so long as they are legally holding over.
I am a proponent of sending September 1st notices each year to agricultural tenants (whether farm or ranch). A person never knows what is going to happen in the off season. Your tenant could file bankruptcy, and then you are obligated to lease to them again because you failed to give notice. Then try to sell your real estate. The bottom line is this. If you have any inkling of selling real estate, give your tenant proper notice.
Commercial property, rentals, agricultural land–all of these examples of “Blackacre” need a clean slate if you want to fetch top dollar. Unless, of course, the rents are so lucrative that that is what is attractive to a buyer. In that case, the reverse may be true–which is to get them tied up into a longer term written lease agreement.
3. Protection of the Deal. When it comes to real estate transactions, the little things matter. Closing dates matter. Earnest deposits matter. Being comprehensive matters. For example, did you know that in Nebraska, a seller must provide a buyer with a property condition disclosure statement before a purchase agreement is ever signed, relative to the sale of a home? See Neb. Rev. Stat. Section 76-2,120. Does Blackacre have a leaky roof? Disclosing that after the deal is inked, puts the entire deal in jeopardy and the seller at risk of being sued.
My personal favorite is the scheduling and setting of a closing date. This is one of the essential terms that is the least thought about in transactions. Seller and Buyer agree to “close” the sale of Blackacre on May 1st, 2016. May 1st comes and goes. Seller and Buyer are getting along just fine, so neither are too concerned. But then Buyer decides that they are no longer interested. Unless Seller “tendered” and tried to close the deal on May 1st, the Seller could be accused of failing to perform the transaction and the Buyer then excused from performance. While this is not necessarily this cut and dried, you get the point. If you can’t make a closing date–get it extended–no matter what. Even if you are selling to a family member.
It is not off-putting to anyone to get a lawyer. Just tell your buyer that it is just for good business measure. It is another layer of insurance to make sure you are protected. To learn more about real estate transactions, please visit the Andrew Hoffman Law PC, LLO Real Estate Section.