Never give seller control of earnest money

Buyer who got cold feet may be entitled to return of deposit

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Apr. 9, 2013

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DEAR DOUG: You were very fortunate, and perhaps your time share was very valuable and the time-share company knew it could be resold. Obviously, every reader who has a time share and wants out should try your approach first. However, I don't guarantee success, but it never hurts to try.

DEAR BENNY: I have read your article where a writer asked what the appropriate entity type residential real estate should be held in. He stated that he will likely turn the property into a rental. You suggested that title be held in a limited liability company (LLC).Granted it is a two-bedroom condo, and likely to generate no more than, say, $50,000 in revenue. Therefore, it will likely not generate more than the usual and customary $800 tax that California LLCs are subject to.

However, it could be misleading to readers to be of the opinion that all residential real estate should be held in an LLC. In California, if an LLC generates more than $250,000 in gross revenues, it would be subject to a fee of $900 plus the tax of $800. If the same entity had $5 million or more in gross receipts, then the fee is $11,790.

As your article implicitly states, the hallmark of real estate is leverage and depreciation write-offs, thereby generating losses. The inherent problem with holding property in an LLC in California is that even if there is $5 million in revenues and $5,000,001 in expenses thereby generating a dollar loss, that entity would still pay an LLC fee of $11,790 plus $800 for a total of $12,590.

Your CV states that you practice in Washington, D.C. I don't know about you, but my California clients wouldn't like cutting a $12,590 check for an entity that is generating a loss after I advised them to put their property in an LLC. --Stephen

DEAR STEPHEN: Many thanks for writing and clarifying the situation in California. You are correct; I don't practice law in California. In general, I still believe that putting property in a limited liability company makes good legal and financial sense. However, as I always point out in my column, you have to consult your own financial and legal advisers before taking any steps that involve real estate and especially investment property.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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