HOW TO DO A PRIVATE REAL ESTATE TRANSACTION WITH A KNOWN BUYER – PRIVATE PROPERTY TRANSFERS, SIMPLE AND COMPLEX

Do I need a broker if I already have a buyer? How do I give or sell a house to a child? How do I sell a commercial building or apartment to a tenant or to another company? Are there lawyers for complicated, known-buyer real estate transactions? Are there lawyers for simple real estate transactions in California? Complete real estate transfer service at CunninghamLegal.

By James L. Cunningham Jr, Esq

What if you want to transfer a property, but not put it “on the market”?

Suppose you want to sell your house to a brother, sister, or child. Or give it as a gift. Suppose a tenant in your office tower wants to buy the whole building from you.

Obviously, you don’t need anyone to hold an open house. And you’re not paying a firm to hunt down a buyer. So does it make any sense to get a traditional broker for what we’ll call a “private transaction”? Do you really need to pay those big commissions of 5% or 6%?

Just as importantly, would the average broker understand the complex tax and estate questions that may arise?

Estate and Tax Issues in Private Transactions Often Require Specific Legal Expertise

Here in California, you can often “sign over” a property to another person with a simple Quitclaim Deed and a few other steps.  But the simplicity ends there, because in many cases, a private sale, gift, or transfer will trigger complex issues of which you are unaware, and which may well require an experienced lawyer.

The property may need to move from one trust to another—requiring a precise set of steps. Multiple siblings may need to be “made whole” in their inheritance rights. Multiple independent appraisals may need to be negotiated and reconciled. Property tax reassessments should be avoided when possible under the law – but in other cases it might make sense to have the property reassessed for other reasons.

As a simple example: A gift or sale for less than market value of a property to a child may unintentionally saddle them with huge and unnecessary capital gains taxes when they go to sell; because you may have denied the step-up in cost basis they would have received had you all waited until your death to pass on the property. As another example, a sale to a sibling may trigger a re-assessment with an enormous property tax rise.

Structured improperly, private real estate transactions can lead to catastrophic tax, trust, and inheritance consequences for everyone—perhaps many years down the road. Structured properly, they can preserve the valuable Prop 13 property tax caps, avoid or defer capital gains taxes, ensure fairness in the passage of estates, avoid estate taxes, and prevent unnecessary liability for both buyer and seller.

Regardless, it often makes no sense to pay a 5%-6% commission for unneeded services from a traditional broker, whose understanding of things like revocable and irrevocable Trusts, California property tax law, and 1031 exchanges may be imperfect at best.

How We Handle Private Real Estate Transactions at CunninghamLegal

If you are considering such a transaction, I urge you to explore options other than common brokers, and make sure to get the advice of an experienced attorney if you are at all unsure about the unintended consequences of the transfer.

At CunninghamLegal, we have created a comprehensive private real estate transaction practice which includes brokering of a real estate deal while handling all the related tax, trust, and inheritance issues—with lawyers specifically trained in this field.

We have licensed brokers on staff, and our brokerage fees on simple transactions generally run only 1.5%, which is an enormous savings over traditional fees. Meanwhile, our legal team handles even the most complex commercial and intra-family transfers in ways that save our clients many thousands or even millions of dollars in taxes—while preventing legal and estate headaches for all concerned.

Importantly, because our clients work directly with our attorneys, they are simultaneously represented both financially and legally, and enjoy confidential, attorney-client privilege, which is often a critical difference from working with a simple broker.

CunninghamLegal also maintains a close relationship with a major national real estate brokerage, and can draw upon their resources to, for example, handle the sale of a property in another county or state.

Preserving Prop 13 Caps in a Private Transaction is Complex, But Often Possible

In California, a major issue in the transfer of any property is the question of a reassessment for property taxes under Proposition 13.

Prop 13, which passed overwhelmingly in 1978, was an amendment to the California Constitution which rolled back residential property taxes and capped them at 1% of assessed value (plus some local additions by county). Assessments were allowed to rise at a maximum of 2% a year—even though real estate prices in California continued to skyrocket.

Properties are reassessed in value when a change of ownership occurs either by death, gift, or sale. In other words, when the property is “transferred,” or what the California State Board of Equalization calls a “change in ownership.”

Proposition 13 has been amended many times over the years, along with the definition of “change in ownership”—most recently by the hugely important Proposition 19, which passed in November of 2020 and has received far too little press. Prop 19 created both devastating consequences and new opportunities in California property taxes—and CunninghamLegal has established itself as the premier expert in Prop 19 transfers while preserving Prop 13 tax caps.

Getting Transfers Wrong Can Lead to Catastrophic Property Taxes

The issues and strategies around Prop 13 and Prop 19 are complex, but at the most basic level, everyone in California should know that the consequences of transferring a property from family member to family member, from divorced spouse to divorced spouse, from a trust to a person or a person to a trust without proper, current legal advice in this area can be truly catastrophic.

Your brother may be paying $5,000 a year in property taxes on a house whose assessment is capped at $500,000. When he sells it to you for what seems to be a hefty $1,000,000, the county assessor will reassess the property and perhaps decide it’s worth $2,000,000, and you will suddenly find yourself paying $20,000+ a year in property taxes—forever.

I won’t go into the specifics of avoiding these kinds of reassessments in this article, but know that with the proper legal planning, such a disaster may well be avoided or greatly mitigated.

Making a 1031 Exchange when Transferring Investment Property

Many investors in commercial real estate are unaware of the enormous benefits of “1031 exchanges” under a tax code that allows the owner of an investment property to swap it for another property of higher value while deferring the capital gains tax. As of this writing, the law allows 1031 exchanges to be used more than once, allowing you to daisy chain the deferral of taxes, and build wealth that can be passed down to heirs—making 1031s a crucial part of estate planning, especially for high net-worth families.

As attorneys, we can advise and facilitate on all aspects of a 1031 exchange, including possibly complex estate issues. We also track ongoing changes to these dynamic laws, as well as related legal opinions.

Let’s take Ann and Mike as an example. This couple is in their mid-sixties with four children. They wisely bought a 20-unit, multi-family, rent-controlled building a decade ago as an investment. It’s been profitable and the equity has soared, but after 10 years, they’ve had enough of tenants complaining about leaky toilets, broken windows, and noisy neighbors. Ann and Mike still want to own rental property to fund their retirement and create a legacy for their children, but at this stage of life they just want to invest in a property where they simply collect a check each month. No repairs, no complaints—and they don’t even want to deal with shopping for a new building.

At the same time, Ann and Mike don’t want to pay the enormous capital gains tax bill that might be owed when they sell off the old property.

Through our affiliation with a major real estate brokerage, CunninghamLegal can not only find Ann and Mike a property where they can just collect checks, but we can also make sure they defer the capital gains taxes on the sale of their old building by using a 1031 exchange. The couple’s Estate Plan and Living Trust will be adjusted, and CunninghamLegal will guide the couple through the 1031 time limits they need to follow in order to take advantage of the benefits. We may also take actions like creating a family LLC to control liability, protect the precious new asset, and potentially limit property taxes.

As a mid-size firm, CunninghamLegal also offers the kind of longevity not found with solo attorneys. When Ann and Mike are gone, our firm can administer their trust to make sure the four kids understand and benefit equally from their parents hard work and success—without conflict and hassles.

Saving Commissions on a Simple Real Estate Deal

The standard commission for a real estate agent in California is about 5%-6%, a fee that includes the responsibilities of finding a buyer and then guiding the sale through to completion.

But again, what if you already have a buyer?

Grace is a successful businesswoman who wants to sell a small commercial building she owns that’s worth about $2 million. One of Grace’s tenants has grown to occupy the whole building, and they’d now like to buy the property outright. Together, both parties decide to move forward. All they need is someone to shepherd the transaction through and advise them on minimizing any tax consequences from the sale.

If Grace goes to a broker, she will most likely have to pay their regular 5% commission even though the broker isn’t really doing the bulk of the work. That’s basically the same as paying someone to paint your entire house when all you need is a little touch up.

At CunninghamLegal, as long as the transaction is over $1 million, we charge just 1.5% for facilitating a private, simple real estate deal when the seller already has a buyer. Given the difference between a commission of 1.5% and the standard 5% on $2 million, we can save Grace about $70,000 on the deal! We’ll also make sure the proper tax and estate issues are discussed.

Complex, High-Stakes Real Estate Transactions Need Special Legal Expertise

Here’s a more complicated example.

Let’s say Barbara and her brother, Ben, inherited a mobile home park just outside Los Angeles. Ben owns a controlling 55% interest worth roughly $15 million; Barbara owns 45% worth roughly $12 million. Ben now wants to buy Barbara out to avoid future hassles, and Barbara agrees.

The issue? Both Barbara and Ben have children, and the grandparents had placed the mobile home park inside a “generation-skipping trust” to make sure the investment properly benefitted their grandchildren. This trust may or may not have been necessary, but it makes handling the transaction extraordinary complicated, and frankly, above the pay grade—or patience level—of most agents.

Also, consider that the park was purchased by Barbara and Ben’s parents 30 years ago at just $1 million. That means there’s been a gain of $29 million. In other words, high stakes from a capital gains and property tax perspective. This purchase that needs to be handled by someone who really knows what they’re doing—not just in real estate, but in tax and estate planning as well!

And remember—in this case, there’s already a buyer, so they don’t have to hire a full-service agent just to make a deal happen. We can potentially save these clients over a million dollars on brokerage fees alone, not to mention preserve family harmony and prevent legal headaches far into the future.

Complex Real Estate Transactions Outside Your Area

Even with modern technology, it’s not always easy to conduct business outside our own region, especially if it’s a complicated task like selling a house after a loss.

Let’s take “Doris, Heidi, and Sol” as an example. Doris dies at 98, leaving her daughter Heidi an apartment in Los Angeles, while leaving a 30-acre ranch in Fresno to both Heidi and her brother Sol. Heidi is the Trustee and Executor, but she has spent little time in Fresno, and knows nothing about ranch land. Between all there is to take care of after a death, her own busy career, a brother who wants to know when his share of the money will be available, and a short time frame during which she needs to sell the property, there’s no way Heidi can research selling a ranch in Fresno! Through our affiliation with a major brokerage, we can easily find someone to knowledgeably list the ranch and have it sold at a good price with minimal hassle for Heidi, while handling all the Estate and Successor Trustee issues to make sure Sol properly benefits, as well.

Long-Term Continuity Matters in Real Estate Matters

In one example above, I mentioned the case of Ann and Mike, and the possibility of our firm maintaining continuity in their family’s complex real estate matters when they pass away.

In the area of Estate Planning, continuity often proves vital.

Take “Grower Johnson” who has been a successful almond grower for over 50 years. Now, at age 88, he wants to cash in and turn the farm 30% over to his daughter Penny, with the managing 70% purchased by Keisha, who has been working on the farm for 20 years and (unlike Penny) knows what she’s doing. Everyone has agreed on a price and a timeline, but there are plenty of complexities to consider with Penny, Johnson’s son Carl who lives in the city, and more.

It turns out that Keisha herself is concerned about her impending divorce, and how that may affect her ownership.

Grower Johnson feels overwhelmed. He once had some good lawyers, and they helped move the almond orchard into a Living Trust long ago—but all his former advisors, including his lawyer and CPA, are now also in their eighties and long retired.

At CunninghamLegal, we can pick up where Grower Johnson’s advisors left off years ago and help John and Keisha successfully transfer the orchard while protecting the asset and the heirs. Just as importantly, because we are a mid-size firm with a full team of lawyers, long-term recordkeeping, and plans for our own succession, we can work with Keisha and Grower Johnson’s family over many decades to come—making sure everything goes smoothly for both families down the line.

CunninghamLegal Makes Real Estate Work for You and Your Family

I’ve given just a quick sampling of the many kinds of private, known-buyer real estate sales, transfers, and transactions we shepherd here at CunninghamLegal—saving our clients countless millions in taxes, penalties, and legal hassles every year.

Make an appointment to meet with CunninghamLegal for California Estate Planning, Tax Planning, Trust Administration and much more. We have offices throughout California, and we offer in-person, phone, and Zoom appointments. Just call 866.988.3956 or request an appointment online.

Please also consider joining one of our free online Estate Planning Webinars.

We look forward to working with you!

Best, Jim

James L. Cunningham Jr., Esq.
Founder, CunninghamLegal

We guide savvy, caring families in the protection and transfer of multi-generational wealth.