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Duty to Disclose Adverse Material Facts

Duty to Disclose Adverse Material Facts

Are you a Denver homeowner who is considering putting your home on the market? Maybe your house is already for sell? It is important to know that when you are selling a home, you and your real estate broker have a duty to disclose adverse material facts to prospective property buyers. Disclosures allow buyers to make informed decisions about property and prevent lawsuits over the status of the property down the road.

What is an Adverse Material Fact?

An adverse material fact is a fact that, if known, may cause a buyer to make a different decision regarding purchasing the property or the amount offered. Real estate brokers and people selling property have disclosure obligations under both federal and state law.

It is important to note that sellers are only obligated to disclose known defects, especially if the defects are hidden, or latent. Cracks in concrete basement walls may be hidden by paint and plaster, but can be indicative of significant structural damage to a home. A buyer would almost certainly choose to act differently if he or she knew of these cracks – either by asking for a more extensive assessment, lowering the offer price, or even choosing not to make an offer in the first place.

Federal Disclosures

Under Federal law, property sellers must disclose if a property built before 1978 contains lead-based paint. The Environmental Protection Agency estimates that approximately 75% of homes built before 1978 contain some lead-based paint, which can cause permanent brain damage. Lead-based paint creates a hazard when the paint chips or deteriorates, releasing lead dust into the air which can be inhaled or land on food.

Colorado State Disclosures

Under Colorado law, sellers of residential property must, among other items, disclose:

  • Structural damage to the property, such as previous damage to load-bearing walls or the roof after major storms;
  • Previous flooding, not only because it could create structural damage or mold growth, but because flood waters can bring sewage and other toxins into the home;
  • The home’s source of drinking water;
  • To whom surface and mineral estate rights belong, as well as any oil and gas activity on the property; and
  • Whether the home is part of a homeowner’s association that requires membership and assessment fees

It is important to note that sellers are required to disclose known property defects, even if they have been fully repaired. This will allow buyers to understand the property better and make an informed decision when making an offer. Failure to disclose adverse material facts is the leading cause of lawsuits filed against sellers and their real estate agents. Hiding property defects in order to get a slightly higher bid is simply not worth risking a lawsuit over.

When is Disclosure Not Required?

Disclosure is not required in situations in which information could be psychologically stigmatizing about the property. For example, many states, including Colorado, do not require disclosure if someone passed away in the home. Psychologically stigmatizing disclosure requirements vary by state, so you should speak with a licensed agent or attorney in your state to understand local laws applicable to your property.

This article does not provide legal advice and is for informational purposes only. For questions about real estate brokers and duties of disclosure or other real estate legal needs in Colorado, contact the Law Offices of Eric L. Nesbitt, P.C. at 303-741-2354 or info@NesbittLawOffices.com.

Denver Couple Charged with Felonies for Short-term Rental Violation as City Moves to Tighten Reins on Vacation Rentals

Denver Couple Charged with Felonies for Short-term Rental Violation as City Moves to Tighten Reins on Vacation Rentals

Denver area property owners should remain aware about the dangers of violating the city’s short term rental ordinance.

The city has been cracking down on property owner’s who aren’t vigilantly following the rules laid out in the short term rental ordinance. Read the following article for more information: A Denver couple has been charged with running an illegal short-term rental business through Airbnb, a move industry watchers said is a warning to others who might be breaking the rules.

For questions about vacation rental legalities or other real estate legal needs in Colorado, contact the Law Offices of Eric L. Nesbitt, P.C. at 303-741-2354 or Info@NesbittLawOffices.com.

1031 Exchange

1031 Exchange

David, a real estate investor, calls his lawyer. David relates that he found a property that he thinks is at a low but predicts the price will soon soar. To finance the purchase of the new property, he wants to sell a different investment property, which he just purchased a year ago. Since the purchase, the value of that property has increased significantly. David is concerned that if he sells the old property now, then he will have to somehow absorb a large tax hit because that property doubled in value over the past year.

David’s lawyer tells him that he might not have to absorb any tax hit at all. Instead, the proceeds from the sale of one investment property that is used to purchase another investment property might not be taxed at all because they may qualify as a 1031 like-kind exchange. As a 1031 exchange, explains the lawyer, the tax would be “deferred,” or pushed until a different time, perhaps when David sells the new property.

Armed with this information, David calls his real estate broker to request that he put the old property up for sale. David then calls the broker on the new property to discuss a sales price.

1031 Basics

The substance of a 1031 exchange is that it provides taxpayers neither gain nor loss, in tax terms. when property is exchanged for “like-kind” property. A 1031 exchange usually does not apply to a person’s residence, but to investment properties.

In our example above, suppose David purchased the old property for $500,000 and due to soaring Colorado real estate prices, he can easily sell it today for $1,000,000. This means that David would make a profit $500,000, which is generally taxable. However, because David sold the old investment property and purchased a new investment property, it qualifies as a like-kind exchange. As a like kind exchange, David would not owe the IRS anything at this time for the sale of the property, despite profiting $500,000.

Now, David purchases the new property for $1,000,000. Suppose that in 2020 he decides to sell the property because he does not want to be in the real estate business any longer. Suppose also that the price of the new property is now $1,100,000. David profited on $100,000 on this sale and he will be responsible for taxes on that $100,000. In addition, he will now be responsible for taxes against the $500,000 on the sale of the old property because the tax against that property was deferred, not forgiven. Since the sale of the new property in 2020 is not for a like-kind property, the 1031 advantage goes away, leaving David responsible for all tax obligations owed as a result from the sale of the old property.

In sum, a 1031 exchange is advantageous because it defers taxes on the sale and purchase of similar properties; it is only a deferment, however, so if you take advantage of it now, it does not mean that you will never pay any taxes against it.

As mentioned above, a 1031 exchange is a tax deferment tool wherein a party selling a property will not be assessed tax on the sale of the property provided that such party exchanges that property for a similar property. If such party sells the property at a later date not within the 1031 exchange context, the party will then pay taxes against the sale of that property.

This article provides more detail about the qualifications for a 1031 exchange. The following elements are required for a sale to qualify as a 1031 exchange:

  • Interdependence;
  • Same taxpayer;
  • Receipt; and
  • Identification.

Interdependence

This element requires that the sale of the first property and the acquisition of the second property be interdependent, which means that one does not happen without the other. This is based on the Fifth Circuit ruling in the Bell Lines case from 1973 (a case in which a company sold trucks and then purchased new trucks). The court in that case did not provide specifics of how to determine what qualifies as interdependence, and therefore, the exact definition of “interdependence” is not entirely clear. To definitively attain interdependence, it is good practice to obtain the assistance of an experienced real estate attorney.

Same Taxpayer

The taxpayer selling the property must be the same taxpayer who purchases the new property. As a result, a taxpayer who sells property and later forms a partnership to purchase the new property does not fall under the 1031 exchange guidelines.

There is an exception when an individual sells a property and then purchases a new property as a single-member LLC. In that case, both the sale of the old property and subsequent purchase of the new property will constitute a 1031 exchange.

Receipt

To properly effect a 1031 exchange, the taxpayer cannot take receipt of the proceeds that will be used to make the exchange. That is to say, if the taxpayer is attempting to make the exchange, the taxpayer or anyone who would be considered the taxpayer’s agent must not hold the money from the sale of the old property. Instead, a qualified third party must hold the money in escrow and then use that money to pay for the purchase of the new property.

The taxpayer’s agent includes family members and the taxpayer’s lawyer. Therefore, when attempting a 1031 exchange, the money from the sale must go directly to someone who is qualified. It is a good idea to appoint someone to hold the money long before the sale. The experienced attorneys at the Nesbitt Las Offices can assist in identifying qualified third parties.

Identification

The taxpayer must identify the new property within 45 days of closing on the old property. Therefore, even though a qualified third party is holding the proceeds of the sale, the taxpayer does not have an unlimited amount of time to act. It is therefore a good practice to have an idea about the new property prior to the closing of the old property.

A later article will discuss exchange values of the properties.

For questions about 1031 exchanges or other real estate legal needs in Colorado, contact the Law Offices of Eric L. Nesbitt, P.C. at 303-741-2354 or Info@NesbittLawOffices.com.

Quitclaim Deed

Quitclaim Deed

Even the most amicable divorce can be an emotionally trying experience. A once happily married couple now finds themselves at odds and enduring the difficult task of dividing up their once shared property. Suppose the parties agree to an arrangement to divide the property, per the divorce settlement. Say the parties own real property and suppose that property is in the husband’s name. Per the judgment of divorce, the husband must convey title to the real estate to his soon to be ex-wife. The easiest way to accomplish this is by the husband granting the wife the real property via a quitclaim deed.

Quitclaim Deed

The philosophy of a quitclaim deed is that the grantor of the real property “quits” his or her claim to the property, thereby allowing another party to take the property via a transfer. A quitclaim deed requires that the grantor signs it and states a grantee. A notary must notarize the deed. There is no need for the grantee to sign the deed. Once accomplished, the deed is valid. The grantee can then provide the fully executed deed to the county clerk and recorder where the property is located to record the real estate as property of the grantee.

Quitclaim in a Divorce

Suppose a piece of real property is in the name of the husband and wife and the husband agrees to transfer the property to the wife. A husband can simply provide her with a quitclaim deed that he no longer has interest in the property. This is quick and easy and allows for a smoother transition.

Quitclaim in a Marriage

Similarly, suppose two people marry. As one unit, they want to have joint ownership of their property. To that end, each one can devise his or her personal real property to the other for joint ownership via a quitclaim deed to the new spouse.

Tenancy in Common v. Joint Tenancy

Quitclaim deeds can be relevant in tenancy in common and not as relevant for joint tenancy. A tenancy in common is where people, say a husband and wife, own a property. It can be that each enjoys full and equal use of the property despite one party actually owning a larger piece of that property. Upon the death of one party, the interest of that person will go to that person’s heirs. A quitclaim deed prior to death can help for a smooth and easy transition to the surviving spouse. By contrast, a joint tenancy means that upon the death of one spouse, the other spouse automatically owns the entire property.

In Colorado, a tenancy in common is assumed unless the parties stipulate that the property is owned in joint tenancy.

Other Considerations

Colorado law requires that those who devise a property via quitclaim deed valued at $500 or more attach a form TD-1000 to the quitclaim deed when submitting to the county clerk. A TD-1000 is a Real Property Transfer Declaration. This document is used by the Tax assessor, who determines taxes in part based on property value.

For questions about quitclaim deeds or other real estate legal needs in Colorado, contact the Law Offices of Eric L. Nesbitt, P.C. at 303-741-2354 or Info@NesbittLawOffices.com.

Backup Real Estate Contracts

Backup Real Estate Contracts

The Colorado real estate market is hot. Prices are soaring, even in areas that were “left for dead.” In such a hot market, it is common to have a contract with a second buyer that is contingent on the deal falling apart with a first buyer called a backup contract. That is to say, a seller will negotiate the sale of his or her home with buyer #1, the primary buyer. In the contract, it will target a closing date with that buyer. At the same time, the seller will negotiate a contract for sale of the same property with buyer #2, the backup buyer. The contract will state that in the event the sale with buyer #1 fails, buyer #2 will then be in contract for the purchase of the property. In “normal” markets, such a circumstance is unlikely to occur; in a hot market where demand far outstrips supply, such a circumstance is more likely.

There are circumstances wherein a seller will negotiate multiple backup contracts with various buyers. Later offers from potential buyers would be in order of when those backup buyers signed backup contracts.

Sandstone Case
In 2001, an issue before Colorado courts was when the seller and buyer #1 extended the closing date. In the meantime, buyer #2, who signed a backup contingent contract, claimed that because the deal was not consummated by the date in the contract, which was the term of the contract between the seller and buyer #1, he is therefore placed into the first position. This is the case of Sandstone Investments v. Edward Williams.

In that case, the Colorado Appeals Court ruled that, based on the language of the contract, the seller agreed to a contract with buyer #2 if the sale was not “consummated” by the closing date. As such, buyer #1 took first position and the seller was now obligated to sell the property to buyer #2.

Issues with Backup Contracts
Buyer #2 may believe that he or she will be next in line in the event that the deal fails, which is a common occurrence. In reality, however, negotiating a backup contract will increase the likelihood that buyer #1 closes the deal with the seller. By negotiating a backup real estate sales contract, buyer #2 is sending the message that there is no comparable property on the market to the property being negotiated. As a result, for reasons that a buyer may pull out of a contract, e.g. price too high, better property elsewhere, better neighborhood elsewhere, buyer #1 is less likely to believe that a better deal exists.

In addition, if the issue is air conditioning problems or similar infrastructure issues, buyer #1 is less likely to pull out if he or she knows that others want it. Without a backup, buyer #1 would not clinch the deal; now, with others wanting the same property, buyer #1 is more likely to forgo these issues.

Colorado real estate is red hot. You need an attorney who knows the law and knows the market. For questions about property rights or other real estate legal needs in Colorado, contact the Law Offices of Eric L. Nesbitt, P.C. at 303-741-2354 or Info@NesbittLawOffices.com.

Transferable Development Rights, Part II

Transferable Development Rights, Part II

Transferable Development Rights, Part II

According to reports, part of why the city of Houston has been so devastated in the wake of Hurricane Harvey is because of the discrepancy between the city’s depression-era water and flood system and its modern-day buildings. While the city of Houston, with its large population, aggressively sought to be ranked as a premiere city, its infrastructure was less than premiere, according to those reports. Instead of areas of wetlands absorbing much of the water, those areas are now covered in concrete and are unable to absorb any water. As developers planned buildings and traffic patterns, they did not plan for drainage.

When planning a community or a city, thought must be given to wetlands and open space. Those planning can employ transferable development rights, or TDRs. As mentioned in the first article, TDRs are sellable rights wherein a landowner who owns a right to develop on a property, called a sending area, can sell that right to another landowner who can use those rights, called a landing area. This commonly occurs in an area that discourages development so the landowner can profit from the sale of the TDR while the buyer can develop in an area that encourages such development. Under a TDR transaction, both the buyer and seller retain title to their respective properties; it is the developmental rights that are transferred.

Contesting a TDR

Often, developers who seek to build in areas encouraging high-density face opposition from the locals, who point to local zoning laws that do not permit such building. In truth, TDRs are a powerful tool to further preservation of wetlands and agricultural areas while providing services in high-density areas. When this occurs, it is often the job of the attorney representing the developer to explain this concept to those in the opposition. TDRs are not meant to circumvent existing zoning laws; instead, they are used as part of a plan to properly allocate space.

Upzoning v. TDR

When planning, the parties should be careful not to undermine the purpose of a TDR program. Sometimes, a zoning board, in its zeal to see the success of the plan, will upzone, or grant rights beyond the zoning ordinances, to the developers. While it may score points for a specific project, upzoning undermines the TDR program because it ignores that right. As mentioned, TDRs, unlike specific zoning ordinances, can be used to allocate open space and density. By maintaining the developmental right by the selling area and not transferring it to the landing area, the selling area is at risk of being developed.

Floor Area

Pitkin County, Colorado has a TDR program that developers use constantly. Under the baseline in some areas, residential homes must be at least 5,750 square feet of floor space. However, such floor space can be transferred in increments of 2,500 square feet of floor space.

In Houston, Texas, it seems that developers never instituted a comprehensive TDR program, where developers would purchase TDRs of a wetlands and use that to build elsewhere while leaving the wetlands intact.

For questions about transferrable development rights or other real estate legal needs in Colorado, contact the Law Offices of Eric L. Nesbitt, P.C. at 303-741-2354.

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