Attorneys and kickbacks

Referring client to real estate agent falls under RESPA law
By Ilyce R. Glink
and Samuel J. Tamkin

Q: Is it illegal to reward attorneys in the state of Washington for referring clients that end up doing a transaction? I have checked with several people (real estate brokers included) and am getting various opinions. I do not want to violate the RESPA statute.

A: RESPA is the acronym for the Real Estate Settlement Procedures Act. This law was passed about 30 years ago to prevent parties to a real estate transaction from getting money solely for steering buyers or sellers to a particular company that would provide services in a real estate closing.

To answer your question, at a real estate closing in which the loan used to purchase the property will be governed by the RESPA statute, it would be illegal for any party to that transaction to get a kickback for the referral.

Therefore, a real estate broker can't be paid a referral fee from a mortgage broker for sending a client to the mortgage broker. An attorney can't pay a referral fee to a real estate salesperson for referring a client his or her way. And a title company can't pay a referral fee to a third party for referring business to the title company.

In simple terms, if you are a real estate agent and get a referral from an attorney to assist a buyer in the purchase or sale of a home, it would be improper to give the attorney a fee for that referral.

For more information, you can go to www.hud.gov and see some examples of violations of the RESPA statute along with some useful information regarding referral fees.

Q: My brother and I own some rental property in Florida and have set up a limited liability company (LLC). We need to do a quitclaim deed transferring our personal interest into the LLC.

I have a blank quitclaim deed form but have no idea how to fill it out properly so that it's legal, and I haven't found an attorney in Florida who will do it for us. Is there someplace I can go to see an example of a properly written quitclaim deed?

A: it's surprising that you can't find an attorney to help you out. But you're right: While the form itself isn't that difficult, you want to make sure you get it right.

Sam Tamkin
If you had an attorney help you set up the LLC, you can ask her for some advice. If you did it yourself and still can't find an attorney to help you, you should call a local title company and see if a title officer can offer a referral to a local real estate attorney.

Another question you might want to ask the title company is about your title insurance. Be aware that transferring title to the LLC, you may lose any coverage you had on the title insurance policy you received when you purchased the property.

Your conveyance of title using a quitclaim deed may eliminate any coverage under the title insurance policy. The new LLC will be considered a new buyer not covered under your existing policy.

So you might want to consider transferring title to the new LLC and have the title company issue a new policy to cover the LLC as the owner of the property. Along the way, the title company may also offer to help out in finding somebody to complete the documentation for you.

Q: I read your column in the Tampa Tribune every week, and find the information helpful when advising my (tax) clients. However, I want to comment on a recent column on limited liability companies (LLC) for rental properties.

You seem to suggest that all LLCs are, or should be, corporations. This is not necessarily true. LLCs owned by one individual can be ignored for tax purposes, and the rental profit and loss can still be reported on Schedule E of the 1040 federal income tax return. Hence, there should be no additional return preparation expense or accounting fees for using the LLCs.

Would using this single-member LLC approach may make it easier to re-title the mortgages? Who knows! I'm only a tax guy!

A: Thanks for your comment. While it may be true that LLCs can be treated either as a corporation or partnership for federal tax purposes, an LLC is never a true corporation.

An LLC is a distinct type of entity that is neither a partnership nor a corporation. Instead, it is a company structure that allows owners to have limited liability in case the company has difficulties.

Unlike a corporation, an LLC does not have shareholders, but rather it has members. Unlike a partnership, where the partners may be equally and completely liable for the debts of the partnership but the profit and losses for income tax purposes flow directly to the partners, the LLC structure gives its members liability protection and also allows profits and losses to flow to its members.

Thanks for pointing out that a unique benefit to an LLC that has a single member is that the IRS will disregard the LLC for income tax purposes. That is a great benefit from an accounting perspective and to keep things simple.

Thanks for adding to the discussion.

Go to www.LagretReaEstate.com