By Howard Goldman –
Changes resulting from the Tax Cuts and Jobs Act of 2018, may make this new tax year a true game changer for the real estate market. Our update prepares you with an understanding of the key changes and how they affect the real estate market.
Looking at buying a new property? In the digital age, emails and texts can blur the lines between informal communications and a formal contract. Follow the Five Commandments of texting and emailing to become tech-communication savvy and avoid legal pitfalls.
Zoning board approvals are a vital point to consider when buying or selling a property you plan to tear down. Don’t get zoned out: Use our five-point checklist to make sure you meet all the legal requirements.
II. Tax Cuts and Jobs Act of 2018
With the recent passage of the Tax Cuts and Jobs Act of 2018, there is much concern as to how it affects Real Estate. Let’s examine two questions:
- What are some key changes?
- How will they affect the real estate market?
Mortgage Deduction Interest:
- Reduces limit on deductible mortgage debt to $750,000 for new loans taken out after 12/14/17 (from the existing $1,000,000). Current loans up to $1 million are grandfathered.
- Homeowners may refinance mortgage debts existing on 12/14/17 up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount refinanced.
- Repeals deduction for interest paid on home equity debt through 12/31/25.
- Interest is still deductible on home equity loans if proceeds are used to substantially improve the residence.
- Interest remains deductible on second homes, but subject to the limits.
Exclusion of gain on the sale of a primary residence:
- There is no change; the new code will remain the same as the old one
Major Provisions affecting Commercial Real Estate:
- The final bill retains the current Section 1031 Like Kind Exchange rules for real property. It repeals the use of Section 1031 for personal property, such as art work, auto fleets, heavy equipment, etc.
- The final bill includes the House and Senate language requiring a 3-year holding period to qualify for current-law (capital gains) treatment.
Corporate Tax rate:
- For tax years beginning after December 31, 2017, the corporate tax rate is a flat 21% rate. (Code Sec. 11(b))
Alternative Minimum Tax (AMT):
- For tax years beginning after December 31, 2017, the corporate AMT is repealed. (Code Sec. 55) For tax years beginning after 2017 and before 2022, the AMT credit is refundable in an amount equal to 50% (100% for tax years beginning in 2021) of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability.
Differing views of the impact of the Tax Cuts and Jobs Act of 2018:
According to Capital Economics, “The tax bill could raise the net costs of buying…we doubt that it will have a significant detrimental impact on the housing market…the overall change could be positive for the housing market.”
On the other hand, Mark Zandi of Moody’s Analytics had a slightly more negative outlook, “The tax law changes significantly reduce the value of the mortgage interest deduction,…and property tax deductions, which are capitalized in current house prices…National house prices will be approximately 4% lower than they would have been…”
III. Examining the Offer and Acceptance
In the significant McCarthy v. Tobin case, the Supreme Judicial Court (SJC) of
Massachusetts upheld an Appeals Court decision that a buyer’s offer to purchase was a firm offer that became a binding contract the moment it was accepted by the seller. The SJC ruled that the Purchase and Sale Agreement amounted to a mere memorandum of the already binding contract, since the parties had already agreed on the material terms within the offer to purchase.
In contrast to McCarthy, the Massachusetts Land Court in the Singer v. Adamson case held that an email communication between a potential buyer and the seller’s broker did not meet the requirements of the Statute of Frauds, due to the generic nature of the email, and the lack of such previous communications between the parties. As such, though a legally binding offer and acceptance can be made via email, it must include the material terms of the offer, and overall indicate that a valid offer and acceptance is the intention of the parties.
Texting and the Law: An Overview
The recent “text” case that has everyone talking is known as St. John’s Holdings,
LLC. v. Two Electronics, LLC. There, text messages between two real estate brokers, amounted to a legally binding Purchase and Sale Agreement, and meeting the requirements of the Statute of Frauds.
In St. John’s Holdings, weeks of negotiating a commercial real estate deal culminated when the buyer’s broker sent an email to the seller’s broker, stating that his client was “ready to do this”. The email was followed by a series of texts including the quintessential one in which the seller’s broker requested that the buyer sign the final Letter of Intent first, saying in part “Can Rick sign today and get it to me today? Tim”.
The buyer proceeded to sign the final Letter of Intent and tendered the deposit check with the buyer’s broker. However, on that same day, the seller had received another offer on the property, and proceeded to sign that new offer. The buyer sued, claiming that the emails and texts amounted to a legally binding contract, and the Massachusetts Land Court agreed.
The St. John’s Holdings Fallout
The decision in St. John’s Holdings was made by the Land Court, which does not
have the ultimate, binding authority as the Appellate Court. Still, St. John’s Holdings has still established an important legal precedent that has many real estate professionals concerned. Mere months before St. John’s Holdings, in a case known as Donius v. Milligan, the Massachusetts Land Court held that texts between brokers, negotiating the purchase of a Provincetown condominium, did not constitute a legally binding contract.
The brokers in both cases were lucky not to be added as parties. However, that does not mean that they couldn’t have been included as “necessary parties”, and therefore enmeshed in the complications of litigation.
The Five Commandments of Texting and Emailing
Since the case law surrounding this issue is rapidly evolving and sometimes
seemingly contradictory, these “Five Commandments” below can help.
- Don’t Sign Your Name. The broker in St. John’s Holdings made the mistake of including his name “Tim”, at the end of the text. The judge interpreted that as a “signature”, thereby satisfying one of the requirements of the Statute of Frauds.
- The Closer You Get, the More Careful You Should Be. In Donius v. Milligan and Singer v. Adamason, the parties had not yet agreed on all of the material terms necessary for the property sale. The judge therefore gave leeway to the text exchange between the brokers, recognizing them as communications rather than a binding contract.
- Add a Disclaimer. Since texts are conveniently brief, it would be impractical and impossible to add a disclaimer after each one. Begin negotiations with a disclaimer stating that any electronic communications meant simply as part of the negotiation process, and not as a contract, cannot be interpreted as such.
- Is There Consideration? One of the main differences between the St. John’s Holdings and Donius cases was the in-hand delivery of a check, versus emailing a scanned copy of a check, respectively. For the court, this boiled down to one thing—consideration. Without consideration there can be no binding agreement.
- What Are Your Intentions? Both courts in these cases looked at the facts as a whole, and drew conclusions regarding both parties’ intentions. The more actions and writings are used to interpret a contract, the more likely it is that emails and texts can be construed as the writings supporting that contract.
Before you casually send that next email or text message as part of your real
estate dealings, remember that these seemingly casual exchanges can amount to a binding contract. Think twice before you text or email, and be especially cautious when those messages contain material terms, can seem like an intentional agreement between the parties, exhibit some form of consideration, and are signed. Though these recent, legal developments can be complicated, being aware of the legal dos and don’ts of texting and emailing can help protect you and your clients from entering into a binding, enforceable contract. That way, you can use the convenience of emails and texts to your advantage, worry-free.
IV. Considerations when buying or selling a house to be torn down
Before you purchase a prospective tear down, you should consider whether prior Zoning board approval or special permit is required.
In Bjorklund v. Zoning Board of Appeals of Norwell , the Court held that the Town’s zoning board could stop a homeowner from tearing down a small house and replacing it with a bigger one. “Our decision recognizes that many municipalities do not welcome the building of structures that represent the popular trend of ‘mansionization.’“Bjorklund v. Zoning Board of Appeals of Norwell , 450 Mass. 357 (2008).
Keep in mind the legal requirements for a special permit:
- That the use is in harmony with the general purpose and intent of the bylaw;
- That the use is in an appropriate location and is not detrimental to the neighborhood and does not significantly alter the character of the zoning district;
- Adequate and appropriate facilities will be provided for the proper operation of the proposed use;
- That the proposed use would not be detrimental or offensive to the adjoining zoning districts and neighboring properties due to the effects of lighting, odors, smoke, noise, sewage, refuse materials or other visual nuisances;
- That the proposed use would not cause undue traffic congestion in the immediate area.
The recent court case of Palitz v. Zoning Board of Appeals of Tisbury, 26 N.E.3d 175 (2015) indicates that tearing down the existing structure and building a new one created a new zoning non-conformity that deprived the new owner of the grandfather status that it might have had under the current zoning code. This tear down now necessitated the new owner to obtain a variance.
About the Authors
Attorney Howard S. Goldman is the founding partner of the law firm of Goldman & Pease LLC, 160 Gould Street, Needham, Massachusetts 02494 (781) 292-1080. Mr. Goldman concentrates his practice in the areas of real estate, finance, and civil litigation, where he represents property managers, lending institutions, developers, and contractors for more than thirty years. He is an active member of the Massachusetts, Norfolk, and Rhode Island Bar Associations in his field and is also an active member of CAI and IREM, where he frequently lectures and writes columns affecting the real estate and finance industries. Mr. Goldman serves as a member of the Zoning Board of Appeals for the Town of Needham and as a court appointed mediator at the Boston Municipal Court and as a pro bono advocate at Federal District Court mediations.
DISCLAIMER: THIS CLIENT UPDATE IS NOT A SOURCE FOR OFFICIAL TAX OR LEGAL ADVICE BUT JUST TO BE USED FOR GENERAL INFORMATION. ALWAYS CONSULT A PROFESSIONAL BEFORE MAKING ANY TAX DECISIONS.