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Common Real Estate Pitfalls

posted on December 18, 2018 by Willingham & Cote

by Scott Breen, Real Estate

       

 

As a result of the internet and other resources that are available to individuals, many people are taking it upon themselves to draft their own legal documents.  Some people believe they can become versed on a particular topic by reading a few articles and obtaining forms that are made available online.  Although this is true in some instances, it can be very risky.

I have personally seen the horrors of the “do-it-yourself” legal kits and using internet resources.  This can make a litigation attorney very rich but often makes your life miserable.  I have outlined three examples of real estate pitfalls that I have seen just in the last few months.    

I.          Joint Ownership With Boyfriends and Girlfriends

Multiple clients have come into our office indicating that they purchased real estate with their boyfriend or girlfriend.  This is almost always a bad idea.  I generally get involved only after the couple broke up and they expect me to fix their problems.  I am usually told by my client that his/her significant other moved out of the property and my client is paying all of the bills (including a mortgage).  Of course, my client believes that I can somehow remove the other person from the title to the property quickly and easily.  In many instances, there is no way to cure the situation without filing a lawsuit against the other person and asking the judge to assist in clearing title.  The client then finally realizes the extensive time and cost that this error has caused.   The bottom line is:  you better have a very good reason to purchase real estate with a boyfriend or girlfriend.  If there is a good reason, the couple better have a very good plan (in writing) in the event that the relationship does not work out.

II.         Deed from Parent to Child Immediately Before Death

A second example of a real estate problem that I have seen numerous times in the past year is the parent who is trying to make it “easy” on their children by conveying property just before death (in fact, one client’s parent conveyed real estate within two days of death).  The children generally come into our office and happily indicate that the parent avoided probate by conveying the real estate before death and now they need assistance in selling it.  Most people do not realize that property owned at the time of death generally gets a “step up” in basis.  This means that the basis of appreciated real estate is increased to equal to the fair market value as of the date of death.  For example, if a parent purchased real estate for $10,000 and it is worth $50,000 on the date of death, then the property will have a basis of $50,000.  Theoretically, if the children then sold the property on the date of death, they would not have to pay any capital gains taxes.  If the parent conveys the property before death, then the property does not receive any step up in basis and the beneficiaries (children) have to pay capital gains taxes on $40,000 of income.  Transferring property before death is not always a bad idea but you certainly want to make sure that it is done in a thoughtful way.

III.        Transferring Property Between Businesses

Many business owners believe that they can simply transfer real estate between themselves and various business entities without legal consequences.  The transfer of real estate (even if no money is exchanging hands) often causes an increase in the amount of property taxes that the owner will have to pay in the future.  Whenever there is a “transfer of ownership” in real estate, the “taxable value” can be increased to equal the assessed value.  This is generally called “uncapping” of the taxable value.  This topic is complicated and is beyond the scope of this article.  However, one should be extremely careful whenever property is transferred between businesses or to/from an owner of that business because it can drastically increase your property taxes. 

If you need assistance in navigating through the technical world of real estate transactions, you may want to consult with an attorney or other specialist in this area.

Scott A. Breen is an attorney and shareholder at Willingham & Cote’, P.C. in East Lansing, Michigan.  Mr. Breen also has a Master of Laws degree (LL.M.) in taxation.  He specializes in the areas of business and real estate transactions as wells as hospitality and alcohol beverage law.  Mr. Breen may be reached at 517-324-1021 or sbreen@willinghamcote.com.

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