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CAPTIAL GAINS QUESTIONS ARE BACK

Now that prices have recovered, people are asking me about capital gains taxes again. There are a lot of myths out there on this topic.

 

The most common myth is that you have to buy another home of equal or greater value in order to avoid paying capital gains taxes. The second is that you must be at least 55 in order to avoid capital gains tax. The third myth is that your capital gains tax will be figured on your equity (sales price minus mortgage balance). None of these are true. Some of them WERE true prior to May 7, 1997, before the tax law changed.

 

Under current tax law, most of the time you can sell your primary residence and avoid capital gains taxes on up to $250,000 of gain if you are single, and $500,000 if you are married. If you have lived in your home for at least two out of the past five years, this will qualify as your primary residence. It doesn’t matter if you are buying another home or not, it doesn’t matter how old you are, and it doesn’t matter if you are currently living in the home.

 

“Gain” is defined as your profit on the transaction, not your equity. Gain is sales price minus selling expenses minus purchase price minus buying expenses minus improvements.  Your buying and selling expenses are your closings costs, inspections, commissions, etc. Improvements are anything that you’ve done to upgrade the home. This does not include what you’ve done to maintain it, only capital improvements. So putting in a pool is an improvement, painting the exterior is usually not (unless you painted it in order to sell it, then it could be argued that it was a “selling expense”).

 

THIS IS GENERAL INFO. SEE A TAX EXPERT FOR SPECIFICS TO YOUR SITUATION.

SINGLE AGENCY VS. DUAL AGENCY

Using the same agent to represent both buyer and seller is 100% legal, as long as all parties are made aware and agree to this BEFORE signing a contract. While it is legal, that doesn’t mean that it will always be in your best interest.

 

The biggest problem with using a Dual Agent is that the agent has a legal duty to get the best “deal” for the seller, and the best “deal” for the buyer at the same time.  This goes beyond just price; there are nuances in how agents write up and negotiate the contract to best protect their clients. A Dual Agent might aim for the middle ground to try to be fair to both parties. In addition, if the transaction starts to go sour, the agent may be feeling more pressure than normal to “keep the deal together.” When you have an agent that only represents you, that may give you more “walk-away power.” For example, a Buyer’s Agent might say to a Seller’s Agent, “If your Seller won’t fix the roof, my buyers will go buy another home.”

 

However, there are many advantages to using a Dual Agent. First, the negotiations go much faster and with less misunderstanding. By taking one person out of the loop, communication flows much better. The listing agent does has first-hand knowledge of the home and about the seller’s needs. Another advantage is that many agents will offer a financial discount, usually to the seller, when representing both sides.

 

Remember that you, the client, are in charge. You get to pick who your agent is, and you decide if you are comfortable with Dual Agency. You should be a little bit cautious if an agent exerts extreme pressure on you to agree to Dual Agency against your wishes.

BUYER’S AGENT VS. SELLER’S AGENT

In the past, all real estate agents worked for the benefit of the Seller. This was called “sub-agency.” If you told your agent, “Let’s offer $450,000, but we’ll go $460,000 if we have to,” that agent had a LEGAL duty to tell the Seller that you would go $460,000. Luckily, sub-agency was done away with in California quite a while ago.

 

There are now three basic types of agents—1. Buyer’s Agent. 2. Seller’s Agent. 3. Dual Agent. A Buyer’s Agent owes “A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Buyer.” A Seller’s Agent owes this fiduciary duty to the Seller exclusively. A Dual Agent has a shared duty of “fair and honest dealings” to both the Buyer and the Seller.

 

Here is how this works in real life: You are out looking at open houses without an agent and see a home that you’d like to buy. You have a couple of options at this point. Let’s say that you already have a relationship with an agent. You would leave the open house, and then call your agent, who will help you write up an offer. In this case, your agent will represent you and try to get you the best deal, and the listing agent will represent the Seller and try to get them the best deal.

 

Now let’s say that you’ve just arrived in town that morning so you don’t have a relationship with an agent. The listing agent who is there seems friendly and trustworthy. You decide to write up an offer with the listing agent. In this case, the listing agent will be representing both you and the Seller as a Dual Agent.

 

As a third option, you don’t have an agent yet, but don’t feel comfortable using the Seller’s Agent. In this case you would again leave the open house and do some quick research to find an agent to represent you, hopefully a referral from someone you trust.

 

In my next article I’ll discuss the pros and cons of using a Dual Agent versus having your own Buyer’s Agent.

WHO PAYS?

In our area, it used to be customary to have the Seller pay for a termite inspection of the property. Recently our standard contract changed to where it doesn’t mention this report, so the Buyer either pays it, or has to amend to their offer asking the Seller to pay for it. This small change means that it’s almost always the Buyer who pays for all the inspections of the property. Buyers often ask why the Sellers aren’t paying for these inspections to show that their house is in good shape.

First and, perhaps, most important, there is the importance of bringing in a neutral third-party. You don’t pay the used car dealer to inspect the car he is selling you.  So you don’t want the home inspection controlled by the Seller. This isn’t really a question of whether you can trust the people from whom you’re buying the house.  It’s a matter of having the inspectors working for and reporting to you, not to the Sellers.

 

Secondly, it is up to the Buyer to determine how in-depth they want the inspections to go. Some Buyers are OK with a general home inspection that will give them an overview of the home. Others would like separate roof, chimney, HVAC and drainage inspections in addition to the general home inspection. This is especially true for those Buyers that had trouble with their last home purchase because they didn’t do enough inspections.

 

If we left it up to the Sellers, they’d probably opt for the least amount of inspections as possible. Most Sellers honestly just aren’t aware of the exact condition of each component of their home. My favorite line is when a Seller says, “Why do they need a roof inspection? This roof is over 30 years old and it hasn’t leaked yet!”

IS TITLE INSURANCE WORTH IT?

The answer is an emphatic “YES.”

It is true that most title insurance policies never have any claims against them, so some people think they are a waste of money. But in the unusual cases where title problems arise, a policy of title insurance can save you disastrous losses–perhaps even the loss of your property.

Here’s just one scenario among thousands that can cause terrible problems: You are in contract to buy a home from a husband and wife. The week before closing the wife is called unexpectedly out of town by a family emergency. The husband has a friend who is a notary public, who also knows the wife. The notary talks to the wife on the phone and is assured she wants to sell and is “OK” with the husband signing her name to the documents. (Please note that the notary public is violating the law here and when caught would face stiff penalties including possible jail time.)

This may seem like no big deal since the wife really did want to sell the home at those terms. But let us suppose that this husband and wife get a divorce a year or two later and it’s a nasty one. They are fighting and clawing for every dime and every way to spite the other party. The wife remembers she never signed the closing papers, and the house is now worth $50K more than what you paid for it. Suddenly, you could be drawn into a treacherous legal battle where the wife demands that you move out of “her house” or at least write her a big check to go away. Even though you knew nothing about what went on, this could still be a big problem for you. But since you have title insurance, the battle belongs to your insurer.

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