Q: I am the Listing Agent on a home in the MLS and we received multiple offers. One potential buyer represented by another broker stated in the Offer that: “Buyer will pay all commission obligations outside of escrow and Buyer would pay all customary fees and charges normally paid by Seller.” The seller consulted with a qualified California real estate attorney who recommended against accepting that offer because potentially the seller could be accused of participating in a conspiracy to commit tax fraud. Is that a realistic possibility? Why would the buyer want to pay the commission and seller’s costs – ultimately that does not really reduce the amount of money the buyer is paying to acquire the home?
A: Yes, there is a potential claim that the buyer is attempting to defraud the county assessor’s office regarding the valuation of the home (depending upon how the buyer completes certain required forms) and, although sellers are generally not blamed for these schemes if it is proposed by the buyer, there is a potential argument that the seller and both brokers knowingly aided and abetted the false reporting of the purchase price to the assessor.
If a buyer requests a change to the normal commission structure by paying the commission for one or both brokers, it may be an attempt to artificially lower the purchase price to minimize the real property taxes that will be owed by the buyer. These schemes increased after the passage of Prop. 60 which facilitated transferring the tax base of the buyer’s prior home to their new home for people over 55. Prop. 60 specifies that to transfer the tax base, the value of the new residence must be equal or less than the value of the prior residence.
Unfortunately, a buyer paying the brokerage commission and/or any other taxes or charges that are normally paid by the sellers (such as the transfer tax) — so as to artificially lower the purchase price — is NOT an effective mechanism to lower anyone’s taxes. Worse, this effort can ultimately lead to potential, significant liability for all parties concerned in the transaction.
For several years, California law has required the transferee/buyer to sign and file with the county assessor’s office a “Preliminary Change of Ownership Report” (“PCOR”) prior to the close of escrow. See Revenue and Taxation Code Section 480.3. This required reporting mechanism is used to determine the true market value for assigning an assessed value for taxation purposes. A sample reporting form can be viewed and downloaded at:
https://www.boe.ca.gov/proptaxes/pdf/sample_boe502a_rev13.pdf
In Part 3 of the PCOR, Buyers are required to disclose the, “Amount, if any, of any real estate commission fees paid by the buyer which are not included in the purchase price,” and any special terms such as “seller concessions, broker/agent fees waived” as well as the name of the buyer’s broker involved in the sale. This form must be certified by the buyer as being “true and correct” to the best of the buyer’s knowledge and belief.
In some counties, such as San Mateo, the assessor’s office has already been imposing financial penalties for the improper under-reporting of the “real” purchase price. In addition to imposing increased taxes and fines, in some jurisdictions there have been threats that, if it is determined that there was an intentional act to defraud the government of its rightful tax monies, criminal prosecution may well be considered.
Multiple brokers have received claims from senior buyers that their efforts to reduce the purchase price have backfired and they cannot transfer their tax base as anticipated because their new home has been determined to be more valuable than their old home. These buyers claim that they only agreed to pay the commission and try what is referred to as “the pricing subterfuge” at the recommendation of their real estate agent. The broker is then asked to pay the increased tax consequences that will be experienced by the buyers over the expected term of their ownership which, in one lawsuit, was a significant six-figure sum.
It is imperative that everyone understand that there is no realistic, long-term tax benefit to the buyers or the sellers to artificially lower the purchase price by having the buyers pay the commission or any other of the seller’s fees and charges.
PRACTICE TIPS:
- If you are working with a buyer who is requesting that their offer include a provision that the buyer will be paying all or a part of the brokerage commissions, or with buyer paying fees and costs that are customarily paid by the seller, or purchasing personal property from seller at clearly inflated prices, you should advise the buyer that they are legally required to truthfully disclose all of that information to the county assessor at close of escrow in the PCOR reporting form and that those sums will simply be added back into the assessed valuation of the property.
- Never encourage a buyer to engage in any tactics to artificially lower the purchase price. Do not even discuss such tactics with a buyer unless a buyer brings it up, in which case remind the buyer of their obligation to truthfully compete a PCOR form, and that they should review this matter with their own qualified California real estate attorney before proceeding further. This advice needs to be documented with an e-mail or other written communication confirming your recommendations, and you should consider providing a copy of the local PCOR.
- Regardless of who you represent, if the principals insist upon utilizing any of these tactics, you should advise the principals in writing (before they sign any documentation to change who will pay the commission) that they should obtain legal and tax advice from their own qualified California real estate attorney and tax accountant.
- Regardless of who you represent, if any of the principals claim that they are following the legal and tax advice provided by their own chosen experts, make certain that you receive the name and contact information of their experts so that you can confirm, in writing, that the principals are relying solely on the advice of their chosen experts and that the broker is not suggesting, facilitating or promoting the scheme.
- Regardless of who you represent, you should never participate in any scheme to have the buyer pay money to or on behalf of the seller outside of escrow unless it is separate option consideration for a valid option agreement.
6 The Bottom Line: Brokers should clearly state that the principals are proceeding against the advice and recommendations of their agent if they take any steps to artificially lower the purchase price and that broker will not be responsible for any additional taxes, fines, penalties, attorneys’ fees and costs that the principals may incur as a result of proceeding against the broker’s advice.
This Weekly Practice Tip is an attorney-client privileged document for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
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