Real Estate Sales Commissions Can Be Negotiated if Agent Is Willing
QUESTION: Several months ago, I got a good laugh when you wrote about your real estate agent friend who says, “Of course commissions are negotiable. I start at 6% and negotiate up.”
Recently I found out that realty commissions actually can be negotiated. When we listed our home for sale we interviewed five different agents. None was really outstanding. But the last one offered us this commission structure: 6% if she listed the home, but another agent found a buyer (each agent then gets 3%), but only 4% if the listing agent found a buyer.
We agreed to give her 30 days to find a buyer before she put our listing into the multiple listing exchange. After about three weeks she found a buyer who made us an acceptable offer just about $3,000 less than our asking price. Have you ever heard of a realty commission arrangement like this?
ANSWER: Yes. In fact, I have signed listings like that with real estate agents.
When your listing agent found a buyer for your home, some agents would argue that the buyer was not adequately represented. A dual agency is said to exist when there is only one agent in the transaction. While it is true that the buyer does not have a separate agent, I have purchased many properties where only the listing agent is involved, yet I felt I was fairly treated.
There is nothing wrong with only one agent being involved in the transaction, as long as the buyer knows the agent works primarily for the seller. Of course, the listing agent must be fair and honest with the buyer, disclosing any known defects in the property. Congratulations on your successful sale and negotiating the sales agent’s commission.
No Tax Break for Vacation Home Sale
Q: Recently we sold our vacation home in Florida. Our sale profit was about $24,000. We planned to use this money to buy a summer home in Michigan. But then we learned our sale profit is taxable, whereas we thought it would be tax-free. Is there any way we can avoid paying tax on this profit?
A: Sorry, but there is no way to defer the tax on the sale of your vacation second home. As you probably know, you can avoid tax on the profitable sale of your principal residence by using Internal Revenue Code 1034 if you acquire a replacement principal residence of equal or greater cost within 24 months before or after the sale. However, this tax break does not apply to sales and replacements of second homes. Ask your tax adviser to explain further.
What Percent of Home Price Should Land Be?
Q: I own a vacant city lot worth about $35,000 in a working-class neighborhood. As I am debating whether to sell the lot or build a house on it, please advise what percent of a home’s price should be represented by the land value?
A: The traditional guideline has been land should represent no more than 25% of the property’s total value after a home is constructed. Using this criteria means you should build a $105,000 home on your lot, thus bringing the property’s total value to $140,000.
However, in recent years the traditional guideline has been thrown out as land prices rise and the cost of homes built drops in relation to the land cost. In high-priced neighborhoods I’ve seen land costs as high as 50% of the property’s total value. I suggest you talk with local appraisers and home builders to get their viewpoints on what price home your lot will support.
Giving Property Away Could Be Costly Error
Q: I am 78 and have 14 income properties that I plan to give to my two children when I die. But they have offered me a fixed monthly income if I will give them the properties now.
This is very tempting to me as I don’t enjoy the management. Do you think I should give away my properties now rather than willing them to my children? Incidentally, I just had a checkup and my doctor says I am in excellent health.
A: Please consult your tax adviser before you do anything. Giving your properties away before your death could be a costly mistake for both you and your children. You may be subject to a gift tax and they would lose the stepped-up market value basis they will receive if they wait to inherit the properties.
Many people are not aware of the stepped-up basis benefit of inheriting property. To illustrate, suppose you own a property now worth $100,000 which has a $25,000 adjusted cost basis to you.
If you give this property away now, your donee will take over your $25,000 basis for it. Since your donee will have a $25,000 basis in this example, if he or she sells the property for its $100,000 market value, there will be a $75,000 taxable gain.
However, if the same person inherits the property worth $100,000 when you die, your heir will receive a basis stepped-up to $100,000 and no tax will be due if it is then sold for $100,000.
Tax Break Not Given in Non-Residence Sale
Q: I know there is a $125,000 tax exemption for home sellers 55 or older. Is there a similar tax break if I sell my apartment building since I do not live in it, but am over 55?
A: Sorry, but there is no special tax exemption or deferral for elderly sellers of property other than their principal residences. However, you can avoid tax by making a tax-deferred IRC 1031 exchange of your apartment building for another “like kind” investment or business property.
Why Buy Home Where Values Stagnant?
Q: I know you are a strong advocate of home ownership. But in our town the market values have been stagnant for quite a while. The home builders keep building more houses even though our town’s population isn’t growing. The result is an oversupply of homes, thus keeping home prices from appreciating. Under these circumstances do you think buying a home is still a good idea?
A: Yes. However, as you know, I have several criteria for profitable home investing and they especially apply in stagnant market situations like yours: Make as small a cash down payment as possible and obtain as large a mortgage as you can get, buy a run-down fixer-upper house at a below-market price, so you can profitably upgrade it, and view home ownership as a forced savings account.
Unless home prices are declining in your town due to local economic conditions, today could be a great time to buy a home while the market is slow and prices are reasonable.
Don’t Be Misled by IRS About Exemption
Q: I recently phoned the IRS about that $125,000 “over-55” tax exemption, as I am concerned about the three out of five year residence requirement. I was told that if I move out of my principal residence and rent it to tenants for up to two years before selling it, I lose the $125,000 exemption. Is this true?
A: No. When all else fails, read the law. Internal Revenue Code section 121 says: “At the election of the taxpayer, gross income does not include gain from the sale or exchange of property if (1) the taxpayer has attained the age of 55 before the date of such sale or exchange and (2) during the five-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as his principal residence for periods aggregating three years or more. . . . The amount of the gain excluded from gross income under subsection (a) shall not exceed $125,000 ($62,500 in the case of a separate return by a married individual).”
This means you can move out of your principal residence for as long as two years before selling it and still claim the $125,000 tax exemption. Please be aware that the government’s own surveys show the IRS gives wrong answers to as many as 40% of its callers. Please consult your own tax adviser for further details.
Realty Agents Must Present All Offers
Q: At a weekend open house we found the perfect home for our growing family. However, the house was vastly overpriced, based on recent sales prices of similar nearby houses. We told the agent we wanted to make an offer about $15,000 below the asking price. She said she knew the seller wouldn’t accept and refused to even write up our offer to present to the sellers. The house still hasn’t sold and we want to buy it, but at our price. What can we do to get around this agent?
A: That agent breached her fiduciary duty to the seller. Real estate agents must present all offers to their principal, the seller. You should report the matter to both the agent’s supervising broker and to the state real estate commissioner, who will investigate and possibly revoke the agent’s license for violation of fiduciary duty.
Joint Tenancy Not Substitute for Will
Q: Last year you said one of the advantages of holding title to real estate in joint tenancy with right of survivorship is avoiding probate. But what happens, for example, if husband and wife joint tenants are both killed in plane crash at the same time?
A: Joint tenancy is not a substitute for each joint tenant having a will. If both joint tenants are killed at the same time, the one-half share of each joint tenant will pass according to their wishes as specified in their wills.
If no wills are left, the state law of intestate succession determines which relative receives their half of the property. Your example shows why joint tenants should have wills just in case both die at the same time.
No Tax Loss for Rental to Relatives
Q: Last year we bought a two-family duplex. My sister lives in the back apartment. She is physically handicapped, but works at an Easter Seals sheltered workshop where she earns a little money. She wants to pay us $200 per month rent which, is about all she can afford. Can we still depreciate this apartment, which would normally rent for about $500 per month?
A: The IRS says unless you charge fair-market rent you cannot depreciate bargain rentals to relatives or friends. Mortgage interest and property taxes are always deductible, but other expenses, such as utilities, insurance and depreciation are deductible only up to the amount of rent received. This means bargain rentals, which are not profit motivated, cannot produce a tax loss to shelter some of your ordinary income from taxation. Please consult your tax adviser for more details.
Include Inspection Contingency in Offer
Q: This summer, my wife and I want to buy a vacation home. But we don’t want to get stuck with a lemon. We know we should insist on a termite inspection, but is there any way we can check out the plumbing, wiring, foundation, roof and other critical areas before we buy?
A: Yes. Just include an “inspection contingency clause” in your purchase offer. Such a clause might read: “This purchase offer contingent upon buyer’s approval of a professional property inspection report to be made at buyer’s expense on the property within seven days.” If you don’t approve the inspector’s report, you get your deposit refunded.
