October 2010 RCDs

Arbitration

Arbitration provision between buyer and seller unenforceable when a third party is sued

Reported by Kelli Galippo & Jeffery Marino

A buyer and a seller of real estate entered into a purchase agreement, which contained an arbitration agreement initialed by the buyer. Before closing escrow, the seller deeded the property to his broker and, by assignment, the broker became the substitute seller in escrow. A dispute over mortgage payments arose, and the seller’s broker began foreclosure proceedings. The buyer filed a lawsuit against the seller’s broker, as well as the buyer’s broker who was not a party to the purchase agreement. The seller’s broker sought to compel arbitration, claiming any dispute the buyer had under the purchase agreement must be decided in arbitration since the buyer initialed the arbitration provision in the purchase agreement, and the seller’s broker was the seller under the purchase agreement by assignment.  The buyer claimed the arbitration provision in the purchase agreement was unenforceable since the seller’s broker did not initial the arbitration provision in the purchase agreement on acceptance of the seller’s assignment. A California court of appeals held the buyer may proceed with litigation in spite of having activated the arbitration clause by initialing it since only the seller’s broker by assignment of the seller’s purchase rights was a party to the purchase agreement containing the buyer-initialed arbitration provision and the litigation filed included claims against the buyer’s broker who was not a party to the purchase agreement under which the buyer agreed to arbitration. [Valencia v. Smyth (2010) 185 CA4th 153]

Editor’s note — This case essentially provides a loophole for parties to real estate transactions to avoid an otherwise binding arbitration provision in a purchase agreement by taking the “shotgun” approach to litigation. If any party who is materially involved in litigation is not bound by an arbitration provision, then no party involved in the litigation may compel arbitration.

Related first tuesday Forms: 150 – Purchase Agreement; 401-2 – Assignment of Purchase Rights

Assessments

Property owner not liable for water district assessment bond

Reported by Heather McCartney & Alex Gomory

A property owner’s title was subject to a water district assessment lien under the Improvement Act of 1911. The lien was held by a bondholder for monies lent to pay the costs of infrastructure improvements. The bondholder filed a judicial action to foreclose his lien and sold the property to recover his investment. At the sheriff’s foreclosure sale, the price received for the property was less than the amount owed, resulting in a deficiency for the balance of the assessment lien remaining unpaid. The bondholder made a demand on the property owner for the deficiency, which the property owner rejected. The property owner claimed he was not responsible for the deficiency since water district assessments are a lien on land and the property owner did nothing to make himself personally liable. The bondholder claimed the property owner was personally liable for the deficiency since the property owner owned the property securing the assessment bond. A California court of appeals held the property owner was not liable for the deficiency remaining after the judicial foreclosure sale under the water district assessment lien since water district assessments under the Improvement Act of 1911 are a lien on real estate, not the personal liability of the owner of the real estate subjected to the lien. [612 South LLC v Laconic Limited Partnership (2010) 184 CA4th 1270]

California Environmental Quality Act

Neither changed tenant mix nor square footage rearrangement require another EIR

Reported by Heather McCartney & Jeffery Marino

A city prepared an environmental impact report (EIR) for a developer’s plans to build a commercial shopping center. The developer later submitted revised plans that reallocated but did not add square footage within the improvement to accommodate a “supercenter” tenant. The city approved the revised plans and issued the developer a building permit without preparing a supplemental EIR. A citizen sought to freeze the development, claiming the city improperly approved the developer’s plans since the city did not prepare a subsequent EIR to address the reallocation of the shopping center’s square footage or the possible effects of urban decay due to the inclusion of a supercenter tenant. The city claimed reallocating the shopping center’s square footage to accommodate a supercenter tenant did not require a supplemental EIR since the overall size and footprint of the development was unchanged. A California court of appeals held the city was not required to complete a supplemental EIR, since the development’s footprint remained unchanged and the change from a standard tenant to a supercenter tenant does not imply a greater risk of urban decay. [Melom v. City of Made­­ra (2010) 183 CA4th 41]

Contractors

Contractor’s performance of oral agreement to construct home improvements enforceable

Reported by Heather McCartney & Krista Craig

A homeowner and a licensed contractor entered into an oral agreement to construct additional improvements on a single-family-residence (SFR). Prior to completion of the work, the contractor was terminated with an unpaid balance due for work completed. The contractor demanded payment for his labor and materials supplied for the work, which the homeowner rejected. The homeowner claimed the oral construction agreement was unenforceable and he owed the contractor nothing, since home improvement agreements between a contractor and a homeowner must be in writing to be enforceable. The contractor claimed the oral agreement was enforceable since the work was substantially completed under the terms of the oral construction agreement and the homeowner would unjustly benefit if the contractor was not compensated for his labor and materials. A California court of appeals held the oral construction agreement was enforceable and the contractor was entitled to payment for the balance due for completed work since the contractor substantially complied with the terms of the oral construction agreement and the homeowner would be unfairly enriched from the contractor’s services if he were not required to pay. [Hinerfeld-Ward Inc. v. Lipian (2010) 188 CA4th 115]

A tradesman cannot collect for contractor’s services if unlicensed at any time during a job

Reported by Alex Gomory & Jeffery Marino

A homeowner hired a tradesman to perform contractor services at his home that required a contractor’s license. The homeowner was aware at the time he hired the tradesman that he did not have a contractor’s license. The tradesman obtained his license after commencing work but prior to completing the job. The homeowner paid for a portion of the completed work and terminated the tradesman before he completed the job. The tradesman made a demand for payment and the homeowner rejected the demand. The homeowner sought a full refund of all monies paid to the tradesman, claiming he was entitled to a refund since the tradesman performed services requiring a contractor’s license and the tradesman was not a licensed contractor. The tradesman claimed he was entitled to collect a portion of his fee since he was licensed for a portion of the time he performed services for the homeowner and the homeowner was aware he did not possess a contractor’s license. A California court of appeals held the homeowner is entitled to a full reimbursement from the tradesman for all money paid to the tradesman since the tradesman is ineligible to receive compensation for services requiring a license when he is unlicensed at any time during the performance of the services, regardless of the homeowner’s knowledge that he was unlicensed when he was hired. [Alatriste v. Cesar’s Designs (2010) 183 CA4th 656]

Related first tuesday Forms: 133 – Authorization to Provide Services – General Services

Deposits

Buyer’s deposit refunded, not forfeited, when a purchase agreement is breached

Reported by Alex Gomory

A buyer and seller entered into a purchase agreement regarding the sale of a property. The buyer made an initial deposit upon opening escrow which the purchase agreement labeled as a “nonrefundable” deposit. In exchange for extending the date for closing escrow as requested by the buyer, the buyer made an additional deposit into escrow, then released it with the initial deposit to the seller as consideration for the extension. Before escrow closed, the buyer breached the purchase agreement by cancelling escrow without excuse or justification. The seller resold the property at a price producing greater net sales proceeds than a closing of the escrow with the breaching buyer would have produced. The buyer made a demand on the seller to return his deposit, which the seller rejected. The seller claimed he was entitled to the buyer’s deposit since the purchase agreement called the deposit non-refundable and the release of the deposits from escrow was consideration for the extension of escrow. The buyer claimed the seller was not entitled to retain the deposits since the seller suffered no money losses as a result of the buyer’s breach. A California court of appeals held the buyer was entitled to the return of his deposits on his deliberate breach of the purchase agreement since the seller received a greater amount of net sale proceeds on the resale than he would have received from the breaching buyer, suffering no loss justifying a retention of any part of the breaching buyer’s deposit. [Kuish v. Smith (February 3, 2010) _CA4th_]

Editor’s note — Had the seller received less net sales proceeds from the resale of the property, he would be permitted to deduct his loss from the deposit and return the remainder to the buyer. This case is an example of a windfall sought by the seller which would have resulted in the seller being unjustly enriched by keeping both the buyer’s deposit and receiving more net sales proceeds than the buyer agreed to pay for the property — an impermissible punitive activity.

Related first tuesday Forms: 150 Purchase Agreement

Encroachments

No homeowner’s insurance coverage for defending an intentional encroachment

Reported by Heather McCartney & Alex Gomory

A homeowner obtained a lot line adjustment adding an adjacent strip of land to the parcel he owned. The lot line adjustment map was approved by less than all of the adjacent property’s co-owners and recorded. The homeowner constructed an improvement on the strip of land acquired by the lot line adjustment. A dispute arose over the ownership of the strip of land, and the neighbors sued to quiet title to the strip of land in their name and remove the encroachment. The homeowner made a demand on his homeowner’s insurance company to defend the lawsuit, which the insurance company rejected. The insurance company claimed they owed no duty to defend the homeowner against the neighbor’s quiet title action since the homeowner intentionally built the improvement and the homeowner policy only covered accidents. The homeowner claimed the insurance company must defend the homeowner against the quiet title action since the homeowner mistakenly believed he had authorization to build on the land and thus construction on the neighbor’s land was an “accident.” A California court of appeals held the insurance company had no duty under their homeowner policy to defend the homeowner against the neighbor’s quiet title action regarding the encroachment since the improvements constructed on the property in dispute were intentionally placed on the property in dispute. [Fire Insurance Exchange v. The Superior Court of San Bernardino County (2010) 181 CA4th 388]

Editor’s note— Had the homeowner obtained a policy of title insurance before he began construction, the homeowner would have been informed he was lacking consent from the absent co-owner.

Finder’s fees

A finder negotiating a line of credit for funding mortgages is entitled to his fee

Reported by Jeffery Marino

A mortgage loan broker (MLB) entered into a finder’s fee agreement with a finder and agreed to pay the finder a fee for arranging a line of credit to fund mortgages the MLB would make. The finder located a lender and negotiated a line of credit on behalf of the MLB. At no time before entering into the line of credit agreement were funds advanced under the line of credit for mortgages made by the MLB. The finder demanded his fee upon finalizing of the line of credit arrangements. The MLB refused to pay the finder, claiming the finder was not entitled to a fee since negotiation of the line of credit to be secured by mortgages the MLB would make requires a broker license and the finder was not a licensed broker. The finder claimed he was entitled to his fee without the need to be a licensed broker since he negotiated a line of credit, which provided the MLB with the right to borrow money, and was not party to any advance of funds for mortgages the MLB may have negotiated and funded by using the line of credit. A California court of appeals held the finder was entitled to his fee for negotiating a line of credit to fund mortgages without being a licensed broker since the finder only arranged the right to borrow money and no mortgage was involved prior to completion of all negotiation and the execution of the line of credit. [Greenlake Capital V. Bingo Investments (2010) 185 CA4th 731]

Related first tuesday Forms — 115 — Finder’s fee agreement

Homestead

Homestead exemption does not require continuous vesting in homeowner’s name

Reported by Heather McCartney & Alex Gomory

A judgment creditor recorded an abstract of judgment against a homeowner which attached to his home. Later, the homeowner conveyed title to a relative in an unsuccessful effort to refinance and consolidate debts. The homeowner retained all beneficial rights to ownership and continuously occupied the property. The title was eventually reconveyed to the homeowner. The judgment creditor commenced foreclosure on the homeowner’s property. The homeowner made a claim for the amount of his automatic homestead exemption to be paid to him from the net proceeds of the foreclosure on the judgment. The judgment creditor claimed the homeowner lost his right to a homestead exemption since the homeowner transferred his title to a relative and did not own the property as required for the exemption and entitlement to sales proceeds. The homeowner claimed his homestead exemption was valid since he retained all beneficial rights to ownership during the time the title was not in his name. A California court of appeals held the homeowner was entitled to receive the amount of his homestead exemption from the proceeds of the judgment creditor foreclosure sale since, to qualify for the homestead exemption, the homeowner need not continuously hold legal title to the property so long as the homeowner maintains beneficial ownership and actual possession of the property. [Tarlesson v. Broadway Foreclosure Investments, LLC (2010) 184 CA4th 931]

Editor’s Note —While the Tarlesson case was an automatic homestead exemption, a declaration of homestead may be recorded to declare a homestead exemption for use exclusively on a real estate dwelling. [For more information on the differences between automatic and declared homesteads, see November 2007 first tuesday article, Automatic and declared homesteads.]

Related first tuesday Forms: 465 — Declaration of Homestead

Landlording

Unlicensed property manager compensated for services not requiring a broker license

Reported by Heather McCartney & Jeffery Marino

An income property owner entered into a property management agreement with an unlicensed property manager to manage his rental properties in exchange for a fee. The property management agreement called for the property manager to render some services which required a broker’s license, such as leasing apartments and collecting rent, or a contractor’s license, such as repairing and altering property. The property owner failed to pay the property manager in full. The property manager made a demand on the property owner to pay the remaining balance agreed to in the contract, which the property owner rejected. The property owner claimed the property management agreement was unenforceable and the property owner owed the property manager nothing since the unlicensed property manager was performing services which required a broker’s license and a contractor’s license. The property manager claimed the agreement was enforceable for the services not requiring a license since the lack of either a broker’s license or a contractor’s license does not preclude him from recovering his fee for services not requiring a license. A California court of appeals held the property manager was entitled to compensation for the services he rendered which did not require a license since performing inclusive broker and contractor services without a license when a license is required does not render a property management agreement unenforceable in its entirety. [MKB Management, Inc. v. Melikian (2010) 184 CA4th 756]

Related first tuesday Forms: 590 — Property Management Agreement

Tenant recovers rent paid in excess of rent control ordinance limits

Reported by Kelli Galippo & Heather McCartney

A residential landlord rented a unit to a tenant. The unit was constructed without building permits and was never registered under the local rent control ordinance. The landlord changed the tenant rent in excess of rent control limits. Later, the tenant vacated and made a demand on the landlord for all the rent paid in excess of rent control limits. The landlord rejected the demand, claiming the tenant was not entitled to a refund of any rent, since the property was built without a permit and was never registered under the rent control ordinance. A California court of appeals held the tenant was entitled to all rent paid in excess of the limits set by rent control since the rent control ordinance applies to all rental units within the local rent control area, regardless of whether the property is illegally constructed or registered under the rent control ordinance. [Carter v. Cohen (2010) 188 CA4th 1038]

Landlord’s refusal to qualify a tenant based on income from Section 8 funds is not discriminatory

Reported by Heather McCartney & Kelli Galippo

A residential tenant who occupied a unit under a rental agreement requested his landlord join a government rent assistance program, which had issued the tenant a voucher of qualification, and accept federal Section 8 subsidized rent on the tenant’s behalf. The landlord rejected this request. The tenant sought to force the landlord to participate in the government rent assistance program, claiming the landlord had to participate in the program since refusal to accept Section 8 subsidized rent was discrimination based on the source of the tenant’s income. The landlord defended his refusal to join the government rent assistance program, claiming he was not discriminating against the tenant based on the source of the tenant’s income since Section 8 subsidized rent did not constitute income received by the tenant to qualify to rent. A California court of appeals held the landlord has a right to refuse to join the government rent assistance program and accept Section 8 funds paid directly to the landlord since Section 8 subsidized rent is not part of any income received by the tenant, and refusal to accept it from a government agency does not constitute discrimination based on the tenant’s source of income. [Sabi v. Sterling (2010) 184 CA4th 916]

Editor’s note —“Source of income” is defined as income directly paid to a tenant, which is both verifiable and lawful. Since government assisted rent payments are paid by the Department of Housing and Urban Development (HUD) directly to the landlord under a contract entered into by the landlord and the government, the payments are not considered part of the tenant’s income.

Tenant guilty of burglary for breaking into his own apartment with intent to commit a crime

Reported by Alex Gomory & Kelli Galippo

A tenant and his wife jointly signed an apartment lease as co-tenants. The couple had a dispute prompting them to separate, causing the tenant to move out. The tenant returned to the apartment, broke in and stole money from his wife. The wife called the police, and the tenant was charged with burglary. The tenant claimed he was not guilty of burglary since he was listed on the apartment lease, and thus had a right to enter as co-tenant. The wife claimed the tenant was guilty of burglary since the tenant no longer lived in the apartment, and entered without the permission of his wife and with the intent of committing a crime. A California court of appeals held the tenant was guilty of burglary since he no longer lived at the apartment he jointly leased with his wife, and he entered without permission with the intent of committing a crime. [The People v. Ulloa (2009) 180 CA4th 601]

Liability

No immunity for injuries of a recreational user caused by landowner’s active negligence

Reported by Heather McCartney

A property owner’s employee, driving while acting within the scope of his employment, negligently hit and injured an uninvited, non-paying recreational user on the property. The recreational user made a demand on the property owner to compensate him for his injuries, which the owner rejected. The owner claimed he had no liability for the injuries of an uninvited, non-paying recreational user since the owner has no duty of care to keep the property safe or conduct himself to avoid injury to recreational users, called the recreational use immunity. The recreational user claimed the owner was barred from asserting the recreational user immunity defense and was liable for the recreational user’s losses due to his injuries since the recreational user’s injuries were caused by the negligent operation of a vehicle by the property owner’s employee, not an existing condition of the property. The California Supreme Court held the property owner was responsible for the injuries of an uninvited and non-paying user of recreational property caused by the negligent conduct of his employee, since the property owner’s duty of care immunity for injuries to recreational users applies only to claims based on breach of property based duties, not claims for injuries caused by the active negligence of the owner or his employees. [Klein v. United States of America (2010) 50 C 68]

Editor’s Note —California property owners have no duty to keep the conditions of their property safe for non-paying recreational users and no duty to warn these users of hazardous conditions on the property. [California Civil Code §846]

Permits

Impact fees for building permit cannot be a reimbursement for existing infrastructure

Reported by Jeffery Marino & Kelli Galippo

A local agency spent money upgrading community infrastructure, specifically the fire department. A property developer applied for a permit to build housing. After the local agency conducted a study to determine the monetary benefit the housing development would receive from the existing infrastructure, the local agency charged the property developer an impact fee for the amount of the benefit. The property developer sought to avoid payment of the impact fee, claiming the impact fee was improper and uncollectable since the improvements to the community infrastructure were completed by the local agency prior to the property developer’s application for a builder’s permit. The local agency claimed the property developer’s application for a permit was subject to payment of the impact fee so the local agency could recoup their investment since the housing development would benefit monetarily from the upgraded community infrastructure. A California court of appeals held the local agency could not charge the property developer an impact fee as a condition for issuing the permit since the fee will not be used to mitigate an impact brought about by the property developer, but rather to recoup the local agency’s prior investment. [Homebuilders Association of Tulare/Kings Counties v. City of Lemoore (2010) 110 CA4th 532]

Subdivisions

Subdivision law preempts mobilehome conversion ordinance

Reported by Kelli Galippo & Krista Craig

The owner of a mobilehome park filed an application with the city to subdivide his mobilehome park and convert it to a common interest development (CID) to allow for the sale of each space to individual mobilehome owners.  A state-mandated survey gauging tenant approval of the conversion was submitted with the application. The city refused to accept the owner’s application to convert the mobilehome park to a CID, claiming the application was incomplete since the survey did not comply with their ordinance requiring approval of the conversion plan by at least 50% of the mobilehome park tenants. The owner claimed the city’s mobilehome park conversion ordinance was unenforceable since the state’s subdivision law calling for a tenant survey did not require any level of resident approval. A California appeals court held the city was required to accept and administratively process the owner’s application to subdivide the park and the city ordinance requiring approval of a set percentage of the park tenants was unenforceable since the state’s regulation of mobilehome park subdivisions prevents the city from enacting its own measures for compliance under the subdivision law. [Colony Cove Properties, LLC v. City of Carson (2010) 187 CA4th 1487]

Low-income housing treatment under the Subdivision Map Act and Mello Act are not mutually exclusive

Reported by Heather McCartney and Krista Craig

A mobilehome park owner filed an application with the city to convert his mobilehome park in a coastal zone to a residential ownership park under the state Subdivision Map Act, which requires existing low-income tenants to be given the option to purchase his unit or to continue residency as a tenant. The city rejected the mobilehome park owner’s application since it was missing a Mello Act clearance, requiring low-income housing located within a coastal zone which is being converted or demolished to be relocated  or replaced with dwelling units for low-income families somewhere in the coastal zone. The mobilehome park owner demanded his conversion application be deemed complete without clearance for low-income coastal housing relocation/replacement, claiming he need not comply with the low-income coastal housing relocation/replacement requirements of the Mello Act since provisions under the state Subdivision Map Act already protect economic displacement of low-income housing. The city claimed the treatment of the relocation and replacement of current low-income mobilehome park residents under the subdivision rules does not bar compliance of the Mello Act low-income coastal housing relocation/replacement since the subdivision rules only protect the current low-income residents of the mobilehome park and is not in conflict with the Mello Act treatment of low-income housing. A California court of appeals held the state Subdivision Map Act protection of existing low-income residences in the mobilehome park does not preclude the city from requiring the mobilehome park owner to obtain Mello Act clearance since the Mello Act requires the permanent replacement of low income dwelling units due to a mobilehome park conversion.

Also at issue in this case…

Requirement for coastal development permit is a state mandate

A mobilehome park owner filed an application with the city to convert his mobilehome park in a coastal zone to a residential ownership park under the state Subdivision Map Act, which outlines the procedures for a subdivision of property. The city rejected his application as incomplete since it was missing the coastal development permit, which is required for development near the coast by the Coastal Act. The mobilehome park owner claimed he did not have to submit a coastal development permit since the coast development permit was only required for development on the coast and subdividing the land under the subdivision rules does not constitute “development.” The city claimed the mobilehome park owner was required to submit a coastal development permit since development includes any change in the density or intensity of the land, including subdivision, and the mobilehome park conversion is a subdivision under the Subdivision Map Act. A California court of appeals held the city may require the mobilehome park owner to submit a coastal development permit in addition to all other state and local government requirements since development constitutes any change in the density or intensity of the land, including subdivision, and the mobilehome park conversion is a subdivision under the Subdivision Map Act. [Pacific Palisades Bowl Mobile Estates, LLC. v. City of Los Angeles (2010) 187 CA4th 1461]

Taxation

A rental owner cannot include “on call” time to qualify passive losses to offset other income

Reported by Jeffery Marino & Kelli Galippo

An income property owner, whose primary occupation was not a real estate related business, participated in the operation of his rental property. The owner kept a log of his time spent operating his rentals, totaling over 750 hours for the year, including “on call” time. The rental owner reported his rental income losses under the schedule E passive income category as an adjustment to the adjusted gross income (AGI) on his income tax return, which offset other income from taxation. The Internal Revenue Service (IRS) disallowed the owner’s treatment of his rental income losses, claiming he was not entitled to report the losses as part of his AGI since he did not spend the 750-hour minimum amount of time as a material participant in rental activity required to qualify as being in a real estate related business. The property owner claimed he was entitled to adjust his AGI by the amount of his losses since he spent over 750 hours engaged in rental activity, including time spent “on call” for his rental properties. The United States Tax Court held the rental owner’s reportable loss under schedule E is not entitled to be reported as a loss which qualifies to reduce his AGI since “on call” activity does not qualify as material participation in the operation of his rental, and he therefore does not have the required 750 hours to be qualified as a material participant and write off rental losses as a reduction in AGI.  [In re Moss (2010) 135 TC 18]

Editor’s note — Had the property owner in this case been a material participant in the rental activity for his property for five of the last ten years at the time he filed his income tax return, he would have qualified for the rental operating loss deduction regardless of the fact that he did not meet the 750-hour minimum in the current taxable year. [Temp. Rev. Regs. §1.469-5T(a)(2)]

Related first tuesday Forms: 352 — Annual property operating data (APOD) sheet

Principal residence profit exclusion requires two-year occupancy after demolished residence is reconstructed

Reported by Kelli Galippo & Jeffery Marino

A homeowner demolished his principal residence of more than two years and replaced it with a new residence on the same parcel. Without occupying the new residence, the homeowner sold it for a profit.  The homeowner took a principal residence profit exclusion on his federal income tax return to offset the profit on the sale. The Internal Revenue Service (IRS) denied the homeowner’s exclusion of profit since the sale was of a residence the owner had not lived in for two years prior to its sale. The property owner claimed he was entitled to the profit exclusion on the sale of the reconstructed residence since his former residence, which he demolished, was built on the same parcel and had been his primary residence for at least two years. The United States tax court held the homeowner did not qualify for the principal residence profit exclusion on his federal income tax return from profit taken on the sale of the new residence built on the same parcel as his demolished former principal residence since the property owner did not occupy the new residence for at least two years. [Gates v. IRS (2010) 135 TC 1]

Editor’s note — This is a case of first impression, defining “principal residence” within the meaning of the profit exclusion as limited to the dwelling, not the land within the parcel description. Thus, the only nexus between the demolished prior principal residence of the parcel owner and the newly reconstructed replacement residence, which the owner did not occupy, was the same parcel of land. As now defined, a parcel of land on which the dwelling improvements exist does not qualify the owner for the principal residence profit exclusion since an owner cannot occupy land as his principal residence. first tuesday’s impression of the public policy behind the extremely generous homeowner’s tax break is that Congress intended it to be liberally construed in its application, not strictly limited as it was in this case.

City may impose bed tax on parking charges for transient occupancies

Reported by Alex Gomory & Heather McCartney

A guest rented a room subject to a city’s transient occupancy ordinance which imposed a tax on the rate paid for its occupancy. In addition to the room rate, the guest paid a parking charge. The parking charge included a transient occupancy tax required by the city, under their enforcement of the ordinance. The guest made a demand on the city to refund the transient occupancy tax paid on the parking charge, claiming the tax on the parking charge was unenforceable since the city ordinance only taxed the occupancy of a room, not the occupancy of a parking lot space. The city claimed the occupancy tax on the parking charge was enforceable since parking was a necessary use accompanying occupancy of rooms. A California appeals court held the transient occupancy tax imposed under the city ordinance on the parking charge paid by the guest was proper, barring any recovery of the tax by the guest, since parking is a service included in the amenities provided along with the guest’s occupancy of a room. [Batt v City and County of San Francisco (2010) 184 CA4th 163]

Active participation in rental operations required to deduct reportable losses from taxpayer’s AGI

Reported by Heather McCartney & Jeffery Marino

A property owner owned a vacation home which he used and paid a property management company to rent to others. The property owner occupied the property for 27 days in the taxable year. During that time, the homeowner performed maintenance work on the property but failed to document and provide proof of the time he spent actively participating in the maintenance of his property. The property owner deducted his operating loss of less than the $25,000 limitation from his adjustable gross income (AGI) treating the property as a rental, reported within the passive income under Schedule E of his tax return.  The IRS disallowed the deduction, claiming the property owner was not entitled to a rental loss deduction from his AGI since the property owner’s active participation in the operation of his property did not amount to the required 100 hours during the taxable year. The property owner claimed he was entitled to the deduction of his rental loss, since he spent more than 100 hours maintaining the property during the 27 days. The United States tax court held the IRS properly disallowed the deduction of his rental losses from the property owner’s AGI, since the property owner failed to satisfactorily demonstrate he spent more than 100 hours operating the property.

Also at issue in this case:

Owner’s use of vacation home bars reporting loss as rental category adjustments to lower AGI

A property owner owned a vacation home that he used and rented to others. The property owner visited the property for a total of 27 days and rented the property to guests for a total of 12 days, averaging three days of occupancy per guest. The property owner adjusted his adjusted gross income (AGI) by including his losses from property operations, treating his vacation property as a rental property. The Internal Revenue Service (IRS) disallowed the deduction, claiming the owner could not deduct his operating losses since the property owner personally used the property for more than the 14 day ceiling permitted in order to deduct the operating expenses. The property owner claimed he was entitled to deduct his operating expenses since the time he spent on his property was for maintenance, not personal use. The United States tax court held the IRS properly disallowed the use of the operating loss as a passive income category loss to adjust the property owner’s AGI since the property owner did not provide proof that his trips to the property were for maintenance rather than personal use and the average period of occupancy by guests was less than seven days which disqualifies the property as a rental. [Akers v. Commissioner of Internal Revenue (April 21, 2010) __USTC__]

Related first tuesday Forms: 306 — Property Expense Report

Tenants-in-common

Co-owner may force the sale of co-owned property after right to first refusal offer is rejected

Reported by Heather McCartney & Jeffery Marino

Upon the purchase of a vacation home, the co-owners entered into a tenancy-in-common (TIC) operating agreement. The TIC operating agreement included a right of first refusal provision. One owner decided to sell his interest in the property. In accordance with the right of first refusal provision in the TIC operating agreement, the owner first offered his share in the property to the co-owner, which the co-owner declined. The owner sought to force the sale of the property through a judicial sale called a partition action. The co-owner claimed the owner was barred from a judicial action to force the sale of the property since the owner waived his right to partition by agreeing to the right of first refusal provision in the TIC operating agreement. The owner claimed he had a right to have the property sold by the court since he offered the co-owner the right of first refusal and the co-owner declined to purchase the property. A California court of appeals held the co-owner of real estate has the right to a judicial sale via a partition action since the owner fully performed his duties under the right of first refusal provision in the TIC agreement, which is not a waiver of the right to a partition action.  [LEG Investments v. Boxler (2010) 183 CA4th 484]