Helping Clients Identify Blind Spots
October 9, 2017 |
Christopher J. Charles, Esq.
Founder & Partner, Provident Law
Successful REALTORS® understand that satisfied clients are the best sources for referrals. Delivering unexpected value to buyers and sellers is a great way to exceed clients’ expectations. And identifying a real estate transaction’s “blind spots” is an effective way to create loyal clients. Blind spots are potential problems that your client may not be aware of. Here are three (3) easy ways REALTORS® can add value to every transaction.
1. Pay Attention to How Your Buyers Intend to Hold Title.
Ask your investor clients who are acquiring real estate how they intend to take title to the property. And ask your investors selling a property whether they plan to buy another property soon.
These two questions will help identify potential asset protection and tax issues. Your clients are unnecessarily exposing their assets to creditors if their property is in anything other than a dual-member limited liability company (LLC), a limited partnership, (LP) or an irrevocable trust. In our experience, the most common mistake investors make is holding property in a corporation or as the sole member of an LLC. (Caution: married couples owning an LLC are considered one member due to Arizona community property laws.)
Unlike an LLC, a corporation is controlled by its stockholders. If the company’s stock is owned personally by the client, their creditors can seize the stock with a judgment and take control of the company and sell its assets. On the other hand, under Arizona law, the exclusive remedy of an LLC’s judgment creditor is a charging order. A.R.S. § 29-655(C). A charging order acts like a lien on any distributions from the LLC. A creditor cannot take ownership of the LLC away from its owner. And, unlike a corporation, a creditor cannot control the LLC or sell its assets. Limited partnerships enjoy similar protection. In many cases, an LLC or an LP is the most effective way of protecting property from outside creditors. In addition, it helps protect your client’s other assets from any judgment resulting from the investment property.
Ask your sellers if they are buying another property. If the answer is “yes,” they may be able to defer or potentially eliminate taxes due on the sale of qualifying properties. This is accomplished by a Section 1031 “like-kind exchange,” named after the Internal Revenue Code, Title 26, Section 1031. However, there are several formalities and deadlines that require advance planning. It is important that your client seek legal and tax counsel well before the closing of any sale of property.
If your client is not immediately buying another property, then they should consider holding the proceeds from the sale in cash in an LLC or LP. For the same reasons discussed for investors above, holding cash in an LLC or LP allows your client to invest their money while providing protection.
2. Remind Your Clients to Determine Whether the $250,000 Principal Residence Tax Exemption Applies.
Don’t forget to ask your sellers if they have lived in their residence for “periods aggregating” at least two of the last five years. If they have not, they may be subject to significant capital gains tax that can be avoided by delaying the sale of their residence until two years have passed. 26 U.S.C. §121.