Your Estate  . . . with James Ward: Run the numbers past a tax professional before selling your home

“Keep in mind that the Realtor has a vested interest in making the sale. Who is left paying the tax bill? Not the Realtor, but the seller.”

Published in the November 25 – December 8, 2020 issue of Gilroy Life

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By James Ward

Many people in our area have a lot of equity built up in their homes or rental properties. That means that there may be a huge tax bill to pay upon sale of the property.

I’ve seen several cases in the past year where an aggressive Realtor has told the seller that “it doesn’t really matter,” or “it’s no big deal,” or “you should be able to work down the gain amount and not pay any tax.”

Really? Make sure you run the numbers by a tax professional. Keep in mind that the Realtor has a vested interest in making the sale. Who is left paying the tax bill? Not the Realtor, but the seller.

One lady came to me and explained that she was quite ill, her husband was confined to a hospital bed in the living room, and their adult son had a level of disability since birth that prohibited him from holding a regular job and receiving regular employment income. They had already sold their house and paid cash for a new home out in Manteca, and their sale agreement allowed them to stay for 90 days until they had to move out.

The sale had already been closed, and the tax was owed, so I couldn’t change that. I advised the woman that she was going to owe capital gains tax, and she responded that the Realtor had calculated it for her, and she was going to owe about $30,000. With a bit of quick math, I advised her that I thought she would owe about $300,000. She turned pale.

I put my phone in the middle of the table and called a CPA I know, and she confirmed the same thing.

Within a $5,000 to $10,000 range, because we don’t know the exact numbers, this family who had near zero earning ability now owes the government about $300,000 in surprise taxes!

Would they have sold if they had known? I don’t know, and they don’t know either because they weren’t offered the chance to know the truth and then consider their options.

The Realtor, meanwhile, made a beeline to the bank to deposit her commission check.

In another case, my client was in a nursing home on Medi-Cal, so she was protected, but she had given her daughter authority over her expensive home.

The daughter wanted money for herself, and I explained that if the property was sold, the mother would owe about $600,000 in capital gains tax, but we could borrow against the house to get some money for the daughter now and then sell the house after the mother’s death. That way we would avoid the tax.

The mother’s CPA told the daughter the exact same thing — do not sell the house until after your mother dies.

But the daughter’s good friend, the Realtor who wanted her to sell the property, encouraged her to sell now rather than wait.

It sold for more than we thought, and I estimated that the mother now owes about $1,000,000 in tax. The CPA called me, and he agreed with my calculation.

We were both upset with what had happened. The mother now owes about $1,000,000 in tax — and the Realtor “friend” ran off with a commission check of nearly $100,000.

Are all Realtors bad? No, not at all, but I’ve seen it all too often where the listing agent for the property gets caught in the conflict of interest between their own pocketbook and the interest of the seller.

Don’t let that happen to you or someone you know. Check with a tax professional to see what taxes might be owed before you get too excited about selling.

Once you have the facts, you can give better consideration to whether selling now is right for you.