Realtor Woes
March 8, 2007 3:49 PM   Subscribe

Help me find a good real estate agent in Los Angeles (the Valley).

I wanted to write an offer to buy a house where I paid commissions and escrow fees separately from the purchase price. This way, the tax basis in the house would be lower because it would be based on the true purchase price (i.e. it would not include all the transaction fees).

My (ex) agent totally flipped out and all but refused to write the offer (apparently because her commission was based on the reduced purchase price and instead of earning about $18,000 she would only earn $17,000). She wrote the offer incorrectly (on purpose) three times and argued with me for thirty minutes and then she said that she would never write such an offer again because "it only muddies the waters" and she "is worried about her reputation."

I think sellers would be willing to accept a full price offer structured this way (over a lower offer structured the traditional way). And I also think there are real estate agents out there who would write this offer and happily accept their $17,000. Do you know one? Do you think I would have better luck just using the seller's agent as a dual agent?
posted by GIRLesq to Home & Garden (14 answers total)
Have you confirmed that breaking those transaction costs out into a separate payment even legally reduces your cost basis for the property? To me (IANARealEstateOrTaxAttorney), it sounds/looks like a weaselly transaction, and just because you wrote two separate checks, the entire cost is still your basis. Have you read this IRS document?
posted by misterbrandt at 5:25 PM on March 8, 2007

Why do you even want a lower tax basis? A lower basis = larger gains = more taxes. The IRS probably won't mind if you want to claim that you owe them extra money, no matter what you pay for the house.
posted by yohko at 5:58 PM on March 8, 2007

Response by poster: A lower tax basis means lower property taxes each year (a savings of almost $1,000 per year I own the house). While the gains will be slightly higher, after two years they will be capital gains and taxed at a lower rate.
posted by GIRLesq at 6:07 PM on March 8, 2007

Response by poster: Mister Brandt:

This is not a tax fraud or "weaselly." I am not writing two separate checks for real estate. I am writing one check for the home and one check for commissions to the agents for their services. The only reason most buyers do not do this is because they do not have enough cash and need to roll it into their mortgage and mortgages must be for home purchase money.

The document you reference states: "Purchase. The basis of a home you bought is the amount you paid for it. " Real estate agent commissions, if paid separately by the buyer, is not part of the home purchase price.
posted by GIRLesq at 6:14 PM on March 8, 2007

Response by poster: MisterBrandt:

I also think that you are confusing two different figures. One is the purchase price of the home that is used to assess the local property taxes (and that's the number I was trying to lower by paying separate commissions).

The other "tax basis" is the one used to calculate capital gains when you get rid of the home. At that time, the commissions and other costs get added back into the purchase price. You can see authority for this in the document you cite: "Items added to basis. You can include in your basis the settlement fees and closing costs you paid for buying your home. A fee is for buying the home if you would have had to pay it even if you paid cash for the home.

The following are some of the settlement fees and closing costs that you can include in the original basis of your home.

Any amount the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, cost for improvements or repairs, and sales commissions."

posted by GIRLesq at 6:30 PM on March 8, 2007

GIRLesq, I was reading lines like: "The cost of your home includes most settlement or closing costs you paid when you bought the home."
"The only settlement or closing costs you can deduct [from the basis (as I read it)] are home mortgage interest and certain real estate taxes. You deduct them in the year you buy your home if you itemize your deductions. You can add certain other settlement or closing costs to the basis of your home."
"You can include in your basis the settlement fees and closing costs you paid for buying your home. A fee is for buying the home if you would have had to pay it even if you paid cash for the home."

I wasn't trying to sound accusatory (sorry if it sounded that way), I was honestly asking if someone with knowledge of the tax law has confirmed this strategy, or if this is common practice in CA.
posted by misterbrandt at 6:30 PM on March 8, 2007

Why don't you just hire a real estate lawyer? If you already have the property you want to purchase picked out, you could just write the offer yourself (basing it on a form you pull out of one of many self-help legal type books) or you could pay a real estate lawyer to do it. The only thing holding you back from that is the seller's agent's commission. Why not just put a reasonable amount in your offer as compensation to the agent with the condition that it be paid directly to the agent by you? Unless there is some complicating factor, you could potentially save yourself some of that $17K.
posted by ssg at 7:51 PM on March 8, 2007

As a Realtor, I never care about commissions - I mean, I want to get paid but $17k vs $18k is nothing. Also with her split with broker, etc, it could be even less of a difference.

Sometimes buyers/sellers need to simply understand "this is how it works in the world of real estate". What you are describing shouldn't be a big deal, but it's not done that way normally and just screws things up in general.

I'd advise you to see an attorney if I was your agent.
posted by thilmony at 5:04 AM on March 9, 2007

Exactly which fees are you talking about here? I just calculated the property tax on the escrow costs over the actual purchase price and it came out to $90/year. The commissions are generally the responsibility of the seller, not the buyer.
posted by mzurer at 7:31 AM on March 9, 2007

Sorry - the above was based on my home...
posted by mzurer at 7:32 AM on March 9, 2007

And in fact, if you look at the California information,

A property’s "base year value," for real property assessed under Proposition 13, is the property’s full cash value as of the date of the latest change in ownership or completion of new construction.

Have you been looking at What the IRS allows you to deduct is different than what the state bases its property tax on.
posted by mzurer at 7:39 AM on March 9, 2007

Best answer: It just snapped into place what you are proposing - you are offering to pay the commissions in lieu of the seller doing so, thus reducing the effective purchase price. That's pretty clever, actually, if it works.

Email me and I will give you my realtor's contact info, who I found to be great. He can tell you if anyone ever does this and why or why not.
posted by mzurer at 7:49 AM on March 9, 2007

Response by poster: Thanks all for your input. However, I am not seeking tax advice here, I have confidence in the tax strategy.

For those still wondering about the structure, it's just this: Buyer pays all agent's commissions, buyer pays all transfer taxes, buyer pays all closing costs. Then you deduct all those figures from the home's list price and pay the remainder to the seller.

The seller gets the exact same take under my structure as they would under the standard structure.

The property tax is based on what you paid the seller and not the list price so property tax is reduced and you save about a grand a year (on a $700k list price home).

Your tax basis (at time of disposing of the property) will include all the commissions and closing costs in addition to what you paid the seller. So no need to worry about increased capital gains.

The agent's commissions are slightly reduced because they are based on what you pay the seller and not the full list price (so the buyer saves a couple grand there).

As you can see, the buyer savings really add up just from restructuring but it doesn't cost your seller a dime.

But my original question is about the realtor flipping out over writing my offer (what is her problem? I think she'd be happy to get a $17k commission over no commission at all) and whether anyone can direct me to a realtor who is happy to write this kind of offer for a qualified buyer like myself.
posted by GIRLesq at 3:31 PM on March 9, 2007

Les Culver

les at iculver dot com
posted by mzurer at 3:27 PM on March 10, 2007

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