Question:

Are agents qualified to provide tax advice to their clients?

Answer:

Many agents erroneously believe they cannot give their clients advice on the legal and tax aspects of a transaction.

Much of the confusion on this aspect of agency is rooted in the trade union’s code of ethics, which scares agents away from providing any insight they have about the legal and tax aspects of their clients’ transactions.

The boilerplate statement included in listing and purchase agreements used by unionized real estate brokers incorrectly implies that they are not qualified to give tax advice.

The truth: not only are licensees permitted to share their hard-earned tax knowledge, their agency relationship with their client may require them to do so depending on:

  • the scope of the agent’s knowledge;
  • the type of transaction; and
  • the client’s intended use of the sales proceeds.

The type of transaction

Consider a seller’s agent who determines that the tax aspects of a sale are material to a sales transaction entered into by a client since tax information affects the client’s handling of the transaction – for example, in a §1031 transaction. Accordingly, the agent has a fiduciary duty to the client to disclose the extent of the agent’s knowledge of the transaction’s tax aspects.

Further, a knowledgeable seller’s agent is able to go beyond disclosure of mere tax information. They are equipped to assist their client in structuring the sales arrangement to achieve the best tax consequences available.

However, a statutory exception to the disclosure duties exists: on one-to-four unit residential dwellings and commercial properties, a seller’s agent has no duty to disclose their knowledge of possible tax consequences, even if the tax consequences are known by the agent to affect the client’s decision on how to handle the sale of the property. [Calif. Civil Code §2079.16]

Editor’s note — This exception used to be solely for one-to-four unit residential properties, but a law which became effective in 2015 updated the excepted property types to included commercial properties. 

In this case, sellers (and buyers) are expected, as a matter of public policy, to obtain tax advice from competent professionals other than the real estate brokerage office handling the transaction. [CC §2079.16]

The listing agreement needs to specify the broker and broker’s agents do not undertake the duty to advise the seller on the tax aspects of the transactions. Further, on a direct inquiry from the seller (or buyer), the agent is required to respond honestly and to the best of their knowledge. [Carleton v. Tortosa (1993) 14 CA4th 745]

The Agency Law Disclosure addendum attached to listing agreements and purchase agreements eliminates the duty of a broker and their agents to disclose their knowledge about the tax aspects of a sale when affected property is involved. [See RPI Form 305]

Avoiding misleading disclaimers

A savvy broker or agent capitalizes on the tax knowledge they have spent time acquiring by advising clients on the tax results of their real estate transactions, regardless of the type of property involved.

However, the broker or agent who advises a client on a transaction’s tax consequences has a duty to not mislead the client by intentional or negligent misapplication of the tax rules. [Ziswasser v. Cole & Cowan, Inc. (1985) 164 CA3d 417]

To avoid misleading the client, the broker or agent is advised to disclose to the client:

  • their full extent of tax knowledge regarding the transaction;
  • how they acquired this tax knowledge; and
  • whether the broker or agent intends to further investigate the matter or whether the client should seek further advice from other professionals.

Shifting reliance and avoiding liability

Brokers and agents who provide tax advice are best served by involving the client’s other advisors, such as their attorney or tax accountant. Input from others who know the client help the broker eliminate future claims arising from adverse tax consequences said to be due to the client’s reliance on the agent’s opinion.

The most practical (and effective) method for shifting reliance to others or to the client when the broker provides their opinion on a transaction’s tax consequences, is to insert a further-approval contingency provision in the purchase offer or counteroffer.

The contingency provision requires the client to initiate the investigation by obtaining additional tax advice and further approval of the transaction’s tax consequences from an attorney or accountant before allowing escrow to close.

An oral or written warning, or general advice to further investigate as in a disclaimer statement, is insufficient. Advisory statements do not require the client to act. Worse, they do not explain why the broker or agent providing the advisory statements believes the client needs to act to protect themselves. A further-approval contingency provision makes the advice an opinion, to be confirmed by the client before closing. [Field v. Century 21 Klowden-Forness Realty (1998) 63 CA4th 18]

Knowledge of basic tax aspects 

As a matter of basic competency, brokers and agents handling the sale of real estate used in the client’s business or held for investment will possess an understanding of several fundamental tax concepts affecting the sale, such as:

  • the principal residence owner-occupant’s individual $250,000 profit exclusion on a sale;
  • the separate income and profit categories for different types of real estate;
  • the §1031 profit reporting exemption;
  • interest deductions on mortgages;
  • depreciation schedules and cost recovery deductions;
  • the $25,000 deduction and real-estate-related business adjustments for rental property losses;
  • the tracking of rental income/losses separately for each property;
  • profit and loss spillover on the sale of a rental property;
  • standard and alternative reporting and their tax bracket rates; and
  • installment sales with deferred profit reporting.

These tax aspects are basic to the sale or ownership of real estate commonly listed and sold by agents. When applicable, they have significant financial impact on sellers and buyers of real estate. Any agent with a working knowledge of the tax aspects of real estate can and is advised to consider offering a wider range of services — including their expertise on the tax aspects of a transaction — when competing to represent buyers and sellers.

Related articles:

POLL: Do you believe agents are permitted to give clients advice pertaining to contract provisions and tax aspects?

Closing the real estate information gap

//journal.firsttuesday.us/raising-the-bar-of-real-estate-advice/10068/

This article was previously posted in 2015, and has been updated to reflect current law.