Inman

Seller financing without hiccups

DEAR BENNY: We are in our late 70s and have moved out of our house. We are selling the house to our daughter for approximately $338,000 and we are taking back the mortgage.

We have been told the minimal interest rate we can charge her is 1.61 percent without getting in trouble with the IRS. And, it must be renewed each year. Is this correct? Please advise. –Louise

DEAR LOUISE: You are referring to what the IRS calls the "applicable federal rate" (AFR). This is the rate that is a safe-harbor. If you go below the stated rate, you will be hit with imputed interest. The IRS breaks this down into three categories: (1) short-term — loans no longer than three years; (2) mid-term — loans over three years but not over nine, and (3) long-term — loans over nine years.

Let me provide you with an example. The long-term rate for February 2009 was 2.96 percent. If this will be the term of your daughter’s loan, you can safely lend the money to her at 2.96 percent annual interest. (Of course, she can always pay it off sooner, and you have the right to gift her a portion of the loan on an annual basis).

If you were to lend at 2 percent, the IRS will require you to declare — and pay — as if you actually received the full 2.96 percent of interest. This is known as an "imputed interest."

You can find the applicable AFR on the IRS Web site for the month in which you will be making the loan.

DEAR BENNY: In a Bob Bruss article years ago, he stated that if you have an undated IRS Form 4506 in the file with no lender’s name on it, that is a virtual invitation to the eventual loan owner to pry into your private tax returns.

I called my loan company and they sent back this response: "As for the 4506 form, I have spoken with our legal department. The reason the 4506 form remains blank is if we sell your loan. If the page is not signed, we would not be able to provide the loan to you. They have told me that the privacy statement (opt-out document) you signed does not extend to providing information to our investors, and the privacy statement explains if and when we will disclose nonpublic personal information. We can disclose information to an investor at any time because it is part of providing the loan for which you applied."

My question: We did sign and date the Form 4506, but they left the lender name off. Is this a normal practice? –Dean

DEAR DEAN: In my opinion, there are just too many legal forms that potential homebuyers (and refinancers) have to sign in order to get a mortgage loan. And, in my opinion, the most objectionable is IRS Form 4506, entitled "Request for Copy of Tax Return."

You — and Bob Bruss (my predecessor on the Mailbag) — are correct. By signing this form, you have given a blank check to the holder of the document to have complete access to your federal income tax return(s). …CONTINUED

Which year? Well, paragraph 7 of the form specifically asks the signer to list the tax years. But most mortgage lenders want you to leave this blank so that they can fill in the years if they ever want — or need — to have access to your tax returns.

In fact, the IRS specifically states on the form that "if you are requesting more than eight years or periods, you must attach another Form 4506."

The IRS makes it clear on the top of the form that you must "not sign this form unless all applicable lines have been completed." Once again, lenders want you to leave this form blank and just write your Social Security number and sign your name.

I understand the reason why lenders insist that you sign the form. There are fraud cases, and lenders want to be able to investigate your situation if they feel that you have misled them about your income, assets and expenses.

When I conduct real estate closings, I generally fill in the year that settlement takes place in paragraph 7. Thus far, no lender has ever challenged this.

But the bottom line is that if you want that mortgage loan, you have to comply with all of the lender’s requirements, be they reasonable or not.

DEAR BENNY: My husband and I recently received an unsolicited invitation for property tax reassessment. The company wanted $179 up front, and the legal-like look of the invitation will encourage many property owners to bite. I checked several Web sites online that are also offering reassessment services.

Is this offer of services for $179 a scam?

What is a reasonable course of action for property owners who want a reassessment when their property value has fallen considerably? Scams often use P.O. boxes, as does this company. –Helen

DEAR HELEN: You mentioned California Propositions 8 and 13, but since I do not practice law in California, I will have to provide you with general information.

As in California, most states allow a homeowner to appeal the annual tax assessment before it takes effect. There are many property tax reassessment companies, as you learned when you went on the Internet. …CONTINUED

Most are probably legal. However, there are also some scam artists among them. It is especially disturbing that the company contacting you uses a Post Office Box and does not provide you with a real mailing address.

My suggestion: Contact a licensed appraiser in your state. If you do not know any, ask your mortgage lender for a name, and make arrangement directly with that appraiser. It may cost you a little more than $179, but at least you know that you are using a licensed professional.

DEAR BENNY: Your most recent article on creating LLCs for rental properties raised a number of questions. You stated "do not commingle your own funds." What if I set up checking accounts for each of my LLCs, but want to transfer the monthly "leftover" into my personal investments or into my personal checking account where I can use as I please? I have a bank debit card in which I extract funds from for my personal use. They are my investments and I need to have access to the LLC bank accounts to live and enjoy life. That’s the dream.

Further on you stated that as sole member, I should sign papers as "member." Why not owner, president, chairman, janitor, et al., as I am the only person who is named in the LLC? If I am the only member, my signature should be all that is needed.

The problem that I find cumbersome in LLCs is that I have to set up bank accounts for every one of them and thus, I run around with three to four checkbooks. In one LLC, I have several duplexes and triplexes because of the bookkeeping excesses and I would hope that my insurance umbrella of $2 million would cover any law suit. –Bill

DEAR BILL: Your "dream" may also be the dream of a creditor who wants to get at all of your assets. If you commingle funds — i.e. use the funds from one or more of your LLCs as your personal funds — you open yourself up to creditors who will argue that your LLC is only a sham — a paper tiger.

Furthermore, in your single-member LLC, you are the sole member. You are not the janitor, chairman of the board or anyone else. If you do not add the word "member" after your name, once again, a creditor could argue that you did not sign in your capacity as a member of the LLC but in your personal capacity, and thus you subject yourself to potential liability.

A limited liability company (LLC) is a creature of state statute, and all technicalities must be followed very carefully. Yes, it is a pain to have to carry three to four checkbooks around, but it would be more of a pain should you lose all of your investments.

Your $2 million umbrella insurance coverage may — I repeat may — be adequate protection, but if someone gets seriously injured or killed in one of your properties, it may not be enough.

For maximum protection, set up a separate LLC for each of your properties and follow the rules. Ask your attorney for assistance.

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.

***

What’s your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.