Changes stemming from the Tax Cuts and Jobs Act of 2017 allow agents and brokers who earn income as independent contractors or from pass-through businesses to take a significant deduction on that income.

One of the biggest wins for REALTORS® in last year’s tax reform bill is the new 20 percent business income deduction, also known as Section 199A. Almost any self-employed person or owner of a pass-through business (such as an S corporation, limited liability company, or partnership) with eligible income, which the National Association of REALTORS® made sure includes commissions from real estate sales, can take 20 percent off the top after business expenses are taken out.

Of course, there are limits. If you file as an individual, you’re eligible up until your taxable income reaches $157,500. After that, your deduction phases out over the next $50,000, until you reach $207,000.  For couples filing jointly, the taxable income limit is $315,000, with a $100,000 phase-out until you reach $415,000. That applies to your combined income. So, your spouse’s income can impact your eligibility.

Real estate professionals with incomes above those amounts also may be eligible for the deduction but, in this case, it’s based on a formula that looks at wages paid and depreciable business property.

What should you be doing to ensure you’re positioned to get the most out of the deduction in your 2018 taxes, due next year in April? To find out, REALTOR® Magazine talked to Peter Baker, a certified public accountant and principal of Business Planning Group in Washington, D.C. Baker’s practice specializes in real estate agents and brokers and he’s already begun having conversations with his clients about what to do.

Most real estate professionals are sales associates and are sole proprietors. Is there any tactical reason for them to restructure themselves into an LLC or S corporation to get a better deal under the deduction?

No. From the standpoint of 199A, a change in entity type is not necessary because sole proprietorship income qualifies for the deduction. Absent other reasons to change, they should keep filing as a sole proprietorship.  

What if you’re a broker or otherwise have pass-through income in addition to commissions earned?

The deduction is taken on an aggregate basis, so if you have pass-through income from other sources in addition to commissions, then you combine your qualified business income with any qualified business losses before you calculate your deduction. So, if you have $100,000 in net commission income and $50,000 in qualified losses from other sources, the 20 percent would come off the aggregate amount, or $50,000. That means your potential deduction would be $10,000.

What pass-through activities would generate losses?

Many things do. It’s not uncommon for brokerages to throw off losses today because of generous splits with sales associates. So, if you’re a broker-owner who still sells, you might have losses from your brokerage operation while generating commissions earned from your own sales.

What if you have investment rental property or you’re involved in land or property development? Those can throw off losses, right?

These are most often operated in pass-throughs, but we’re still waiting on final IRS rules. So, we don’t know yet about how net rental income and losses will be treated. [Editor’s note: NAR is working with the IRS to get clarification on that question.]

The deduction is taken on your net qualified business income. There’s no change to what counts as deductible business expenses, right?

With the exception of some new rules for depreciation and changes in deductibility for meals and entertainment, that is correct. You take out your expenses in much the same way. Did you travel to conventions? Did you buy a new car? Did you buy a computer? Did you buy office supplies?  

Sales associates and brokers typically aren’t wage or salary earners, so they don’t get W-2 income and are required to pay estimated taxes quarterly. That means they’ve already paid three quarterly estimates for the 2018 tax year even though rules aren’t out on the new deduction, or on other changes in the tax law, for that matter. What’s going to happen come April if their estimated payments are off?

Hopefully they’ve been talking to their professional tax adviser or accountant for the previous quarters. There are two ways to approach estimated tax payments given the new environment. The taxpayer can apply what’s known as the safe harbor approach. That’s where they pay estimated taxes based on their prior year’s tax liability. As long as they do that, even if they end up owing more tax come April 2019, they won’t be penalized or face interest charges for underpayments. They’ll just have to settle up the amount they owe. Of course, if their current sales volume is down from the previous year, that could be a painful way to do it, because they’ll be basing their payments on higher income than they actually earn. So, the alternative is to forecast taxable income based on what they’ve earned year-to-date, subtract business expenses, and look at their pipeline of likely sales to forecast their anticipated earnings for the remainder of the year. Then, they factor in the 20 percent deduction.

If they don’t take the safe harbor approach, are they liable for penalties and interest payments if they underpay their taxes?

Potentially, they would be. However, the IRS has a first-time penalty abatement process for taxpayers who, for the past three years, have paid and filed their taxes on time and haven’t incurred any penalties. So, if they have a good three-year history, they would be eligible for a one-time waiver of penalties and interest payments if they underpay their taxes.

You mentioned final rules aren’t out yet. When can we expect them?

Hopefully, before the end of the year. The IRS will also be revising forms to reflect the new qualified business income deduction. That should also be coming out before the end of the year.

©National Association of REALTORS®
Reprinted with permission

It’s easier than you’d expect to get tangled in the unauthorized practice of law.

In a 2017 Wyoming case, a real estate agent was found to have engaged in the unauthorized practice of law for merely removing inapplicable provisions of a state association’s form. As evidenced in this case, and depending on state law, even minor modifications to a form agreement may constitute the unauthorized practice of law.

What exactly constitutes the unauthorized practice of law varies from state to state. Some states even have specific statutes governing what actions real estate agents may undertake during transactions. It’s crucial for real estate professionals to be familiar with their state’s laws, and applicable rules and regulations, in order to avoid crossing the line.

And beyond state law, Article 13 of the REALTORS® Code of Ethics prohibits the unauthorized practice of law and specifically requires NAR members to recommend using legal counsel when the interests of any party to the transaction require it. REALTORS® should be aware of this ethical obligation when navigating their way through this issue.

Protect yourself by incorporating a few key practices into your business. These practices will help you avoid inadvertently participating in the un-authorized practice of law and ending up with either an ethics violation or a lawsuit.

Don’t Draft, Edit, or Interpret

First, never create your own legal agreements for clients. Instead, use the form agreements provided by state and local REALTOR® associations. These forms are often provided as a member benefit, such as through NAR’s partnership with zipLogix.

Second, even when using a form agreement, be sure to avoid editing the agreement in a substantive way. Limit your editing to filling in nonlegal, factual provisions of the agreement, such as names, dates, locations, and party descriptions.

Should a transaction require edits beyond just filling in factual information, refer clients to a real estate attorney. This is not only your ethical obligation as a REALTOR®, but taking any substantive edits upon yourself could constitute the unauthorized practice of law. If changes are required, you may be able to tap into resources available through your broker. It’s possible a broker may already have had frequently requested clauses or provisions drafted by legal counsel, which may be useful in certain cases.

Third, don’t charge a fee for preparing any of the legal agreements or forms. Numerous states have found that preparing legal documents constitutes the unauthorized practice of law.

And finally, don’t try to interpret legal contract language. The policy reasons behind the unauthorized practice of law are clear. Prior to providing legal advice, individuals must meet a number of requirements, including graduating from law school, passing the state bar exam, and obtaining a license to practice law. These requirements ensure that only people with sufficient knowledge and skills may represent the public in legal matters.

Protecting You—and Your Clients

As transactions become more complex, it’s not uncommon for clients to ask real estate practitioners to interpret a contract. Resist the temptation. The best answer, and the ethical obligation under the Code of Ethics, is to direct clients to an attorney.

There’s a lot at stake: The unauthorized practice of law can result in fines, suspension, and even revocation of your license. Help your clients by recommending they consult an attorney in appropriate circumstances.

By following these tips, you’re not only helping protect yourself against potential legal and ethical trouble but also best serving your clients by encouraging them to get the assistance of a legal expert for the advice they need to complete a successful transaction.

©National Association of REALTORS®
Reprinted with permission

If it looks like a jointly held mortgage will be the answer to getting the transaction done, don’t sugarcoat the facts.

Younger customers frequently look to parents or grandparents to help them get into a first home. As rising home prices and interest rates present even greater challenges for first-time buyers these days, you may encounter more situations involving co-signed mortgage loans. While it’s not your role as a real estate agent to provide financial advice to your customers or their relatives, it’s wise to be prepared with information if you are asked.

There’s little doubt such joint purchases are on the rise. Of home purchase loans in the U.S. in 2017, the latest year for which data is available, 22.8 percent included a co-signer, up from 21.3 percent in 2016, according to real estate data company ATTOM Data Solutions.

Now, what is appropriate to share if your customers raise the issue with you?

Start by encouraging them to speak to a lender or a financial planning professional and recommend that they take no action until they have that conversation. Once you’ve laid out that ground rule, share a few facts with them:

First, as co-signer, you’re 100 percent responsible for the obligation. If the person who’s benefitting from the co-signing loses his or her job and can’t make mortgage payments, you’re now responsible for payments.

Second, co-signing the mortgage will affect your credit. Any delinquency will appear on your credit report. This could affect your ability to get credit in the future—and the interest rate you’ll qualify for—if you apply for a home, auto, personal, business, or student loan.

Third, even if the mortgage payments are made on time and in full each month, being a co-signer on the mortgage can count against you when you’re trying to qualify for future loans. That co-signed loan takes up part of your debt-to-income ratio and restricts your ability to borrow additional money for your own purchases. For that reason, if you have plans to purchase a new car or home in the near future, talk to the lender about how this act of generosity will change your borrowing capacity.

Fourth, your debts will be looked at. As a co-signer, be prepared to provide paperwork to meet the same credit requirements that the borrower is subject to. These include bank statements and income tax returns. Your debt as co-signer will be considered in the loan approval process, with the expected outcome that debt and income from two borrowers will lower the debt-to-income ratio for the loan. For conforming loans, Fannie Mae and Freddie Mac will allow a “blended ratio” DTI that combines the incomes of the occupant and non-occupant co-borrowers. This can help when you aren’t going to live in the house and have most of the income, a common scenario when parents help a child buy a home.

Fifth, as co-signer, consider whether your help is truly helping the buyers. If they could not afford this home without your contributions, is it appropriate for you to offer help? Do they have the cash flow to make the monthly payments? Do you have the capacity to make the payments if they fall behind? Consider whether they are better off in a smaller, less expensive home that they can qualify for on their own.

As an agent, you know that when affordability worsens, the chance of having a transaction involving co-signers grows. To be clear, it remains the responsibility of the home buyer and the co-signer to talk to a lender or professional financial planner to understand the ramifications. But by sharing these considerations with customers, you can help set them on the right track.

©National Association of REALTORS®
Reprinted with permission

Global business and state laws are among the issues that our evolving Code of Ethics addresses.

Our industry is changing. Technology brings new business models and the skill set of REALTORS® keeps evolving. You might be wondering where that leaves our venerable Code of Ethics.

The National Association of REALTORS® adopted its Code of Ethics in 1913, a time when there were few guidelines for those working in real estate. It was established to set a high, consistent standard throughout the country for REALTORS® who helped consumers buy, sell, and lease real estate.

As a living document, the Code is continuously updated, although it can be a challenge to stay ahead of the curve. While the Code typically sets a higher standard than the law requires, the Professional Standards Committee is concerned about the disconnect between some state laws and the Code and will be studying this issue in order to keep our Code relevant as state and local laws change. Here are other priorities for the committee this year:

Models Around the World

NAR has bilateral agreements with dozens of real estate associations around the world. These partnerships have been integral to our members’ ability to tap into the booming global real estate business, because our agreements are only with organizations whose real estate professionals also follow a recognized code of conduct.

We see this exposure to other professional practices as a wonderful learning opportunity for NAR, and we want to take advantage of that by keeping closer track of what codes in other countries require and looking at the best of what other systems include, for ideas we may one day want to incorporate.

Mandatory Ethics Training

Eighteen years ago, the NAR Board of Directors established a requirement that real estate professionals complete quadrennial ethics training. Two years ago, the training became a biennial requirement. In the ongoing effort to strengthen the Code, NAR President John Smaby has established a presidential advisory group to make recommendations that will improve its effectiveness.

Improving Search Terms

An important way we engage with the Code is online, so we’ll be taking a hard look at how to improve the search function on nar.realtor. Right now, finding the relevant portion of the Code and Standards of Practice is fairly straightforward if you know the legal term that applies to your situation, but less so if, like many of us, you use more informal language. We want to be able to find what we’re looking for in the Code more easily using common industry terms.

An Exciting Year Ahead

We have a lot to be proud of. We’re more than 1.3 million members strong, and it all began with a few real estate businessmen who were visionaries. More than a century ago, they looked into the future and saw the value we could and should bring to the American people. I wonder if any of them realized the global impact our association and its Code would have.

That’s why the challenge before us to keep the Code relevant is so important. How do we maintain a higher standard no matter how the industry changes? How do we continue to distinguish our members from the average licensee?

Serving on the Professional Standards Committee, it is our task to focus on the steps we need to keep the Code the guiding force of professionalism that it’s always been. There’s a role for you, too. As a REALTOR®, it is important for you to know your Code. Keep your ear to the ground and your eyes on the prize. When you have or hear a great idea or even a bit of knowledge you think we need, please share it. This is about you, your association, and our future.

©National Association of REALTORS®
Reprinted with permission

Call me Directly:

Anthony DiDonato
ABR, AHWD, RECS, SRES, SFR
Associate Broker
REALTOR®
CENTURY 21 All-Elite Inc.
3900 Edgmont Ave, Brookhaven, PA 19015
Office Number: (610) 872-1600 Ext. 124

Cell Number: (610) 659-3999 {Smart Phones Click to Call}

Direct Number: (610) 353-5366 {Smart Phones Click to Call}

Fax: (610) 771-4480
Email: anthony@anthonydidonato.com

Licensed in PA, DE and NJ

These are the hurdles agents most often face and how to stay in compliance while navigating a transaction.

A Korean-American couple recently asked Brian Bartholomew to show them homes only in Korean neighborhoods. Bartholomew, a sales associate with RE/MAX Cornerstone in Brea, Calif., immediately saw the red flag. “I can’t steer you toward an area just because of race,” he says he told the client. If Bartholomew had done what the client asked, he would have been in violation of fair housing law. The couple decided to continue working with Bartholomew, and he showed them homes in areas they requested by name rather than demographics.

It doesn’t matter that the buyers were the ones to ask for specific neighborhoods based on their racial and ethnic profile. Under the federal Fair Housing Act and the REALTOR® Code of Ethics, you cannot limit your customers’ housing options based on race or ethnicity, among other protected statuses, even if it’s what the client wants. This is just one of many legal issues practitioners may misunderstand. Beyond fair housing, transactional items that can be wrought with legal consequences include disclosures, contracts, escrow management, and lawful property marketing. “Legal issues permeate all aspects of the real estate industry,” says Steven D. Graham, vice president of risk management at the Missouri REALTORS® association.

Graham’s advice to real estate pros—especially rookies—is to “keep in mind that you are not a lawyer, so you should not be interpreting contracts or providing legal advice.” Rather, you should refer clients to their attorneys when a potential legal issue arises. Common legal issues in real estate include:

• Inaccurate listing information. Graham says he’s seen lawsuits over listings using square footage from a local assessor’s office that turned out to be false. The Missouri state association has created a Measurement Disclaimer Form to address square footage. It provides the opportunity to cite the source of the square footage used for a listing but also says, “If exact acreage or square footage is a concern, the Property should be independently measured.”
• Misleading property photos. Using old photos of a property in a listing can lead to accusations of misrepresentation in advertising. Bartholomew recalls going to see one house whose photos showed a lush green lawn, but there was no grass on the property in person. Such a misrepresentation is a violation of Article 2 of the Code of Ethics, which states: “REALTORS® shall avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to the property or the transaction.” A Standard of Practice was added to Article 2 last year addressing the Photoshopping of listing photos.
• Escrow. A buyer who gets cold feet and wants to cancel a deal may also want his or her earnest money back, turning to you to figure out how to retrieve it. You should refer your client to his or her attorney in such a circumstance. Even in places like Illinois, where a real estate broker serves as the escrow agent, the broker cannot release funds without written permission from both parties in the transaction or a court order.
• Wire fraud. Fake emails from scammers instructing the release of escrow funds is a growing problem. If you handle escrow funds, you should have policies in place to verify any wiring instructions that are sent to your clients, says Juana Watkins, general counsel at Florida REALTORS®. Such policies might include a disclaimer on your email signature that you will never give wiring instructions via email, as well as procedures to have clients call you to verify any instructions they receive.

Some legal issues will be more obvious, such as a seller who refuses to disclose a known defect about a property. But what if you need additional knowledge about legal issues? For anything you are uncertain about, use industry resources such as in-house legal counsel, if your brokerage has one, or consult your local or state association’s legal hotline, advises Betsy Urbance, general counsel and vice president of legal services at Illinois REALTORS®. “Those organizations typically have people who monitor what is going on in the industry and publish about it on a daily basis—if not hourly,” she says. The Florida REALTORS®’ legal hotline, for example, fields 70,000 calls and emails a year. The Illinois and Missouri state associations’ hotlines handle roughly 3,000 calls each annually. The most common questions relate to disclosures and representation of properties in marketing materials.

Disclosures: A Constant Legal Bug-a-Boo

Issues around property disclosure are perhaps the most common legal pitfalls for real estate pros. Bruce Aydt, ABR, CRB, a real estate attorney and past president of Missouri REALTORS®, says about 80 percent of claims he’s handled relate to property disclosures. State disclosure requirements vary, so you should know the laws in your area. Remember that although your REALTOR® association may provide disclosure forms, your state may not legally mandate all the items on the list.

But there may be particular disclosure laws that are important in your area. In Missouri, where meth houses are common, the state requires disclosure of methamphetamine production on any property. Local REALTOR® associations there have adopted specific meth disclosure forms they include as an item on the overall seller disclosure form. Aydt notes that agents in Missouri are not required to verify or substantiate any information the seller shares with them about meth production on the property. But agents do need to inform buyers of adverse material facts related to the property that they have knowledge about.

Other disclosures can be difficult as well. Bartholomew recalls one client who had done roof repairs and repainted the ceiling in a room where leaking had occurred. The seller disclosed the work to potential buyers, but while the house was on the market, more rain caused the leak to reappear—and more repairs needed to be done. The seller also disclosed the second round of fixes. When a buyer’s inspector found evidence of the repairs, Bartholomew could point to the disclosure to satisfy the buyer’s query about the roof.

Know Your Transaction Forms

You should read and understand every word in the forms you, your clients, and the counterparties in a transaction are signing. Pay attention to the fine print; you need to know exactly what it says in case your clients skim over it and miss important information. “The more knowledgeable you can become with a contract in all of its forms, the better off you’ll be,” Watkins says.

It’s also wise to keep records of signed documents for every deal. “You never know what may come back to bite you,” says Linda Darer, a sales associate with Julia B. Fee Sotheby’s International Realty in Rye, N.Y. Such records came in handy when Darer worked with a divorcing couple who was selling their home. The husband, who had moved out of the $2 million home in Westchester County, accused his wife—and, by extension, Darer—of being unreasonable and rejecting offers because she didn’t really want to sell. He sought legal avenues as part of the divorce proceedings to force her to accept an offer. The wife’s attorney asked Darer, who kept written records of every offer and counteroffer in the transaction, to furnish the information for the divorce case. The judge, after reviewing the records, determined that the wife was seriously entertaining and countering offers.

©National Association of REALTORS®
Reprinted with permission