National Test - Real Estate Contracts and Agency Flashcards

National Test - Real Estate Contracts and Agency Flashcards installment saleA transaction in which the sales price is paid in two or more installments over two or more years. If the sale meets certain requirements, a taxpayer can postpone reporting such income until future years by paying tax each year only

on the proceeds received that year.NOTE: The license

exam may refer to an installment sale as an "installment sales contract." This is an attempt to cause confusion with an installment contract. An installment sale is not the same as an installment contract.THE IRS TAX CODE AND REAL ESTATEA major advantage to the owners of investment property is the ability to depreciate their investment on their income tax return. On income producing property land can never be depreciated. Only improvements can be depreciated.The straight-line method is used.Depreciable value divided by

economic life = yearly depreciation amount.EXAMPLE:

$275,000 to be depreciated over 27.5 years = $10,000 per year.The economic life is the period of profitable use during which improvements contribute to value, or are being depreciated.agency coupled with an interestWhen an agent is also the seller or the buyer, this is called agency coupled with an interest and this dual role must always be disclosed.Liquidated, punitive, and compensatory damages After breach of contract the injured party has several options. He can seek liquidated, punitive or compensatory damages.Liquidated damages are money damages set out in the contract.Punitive and compensatory damages must be pursued in court.Punitive damages punish the defaulting party and compensatory damages are set to cover the actual injury or economic loss.What approach would an appraiser most likely use to value a residential rent house in a neighborhood where a majority of the homes are leased?a. market data approachb. GRMc.cost approachd. income approach b Voidable vs. Unenforceable Contractin a voidable agreement one party has the right to withdraw (a minor, someone who signed under duress, or under the influence of alcohol or drugs, an injured party, etc.).The unenforceable agreement is one that violates the Statute of Frauds and will not be enforced by the courts - the verbal real estate agreement.Termination, rescission and breach of contract A contract may be terminated for any of several reasons including bankruptcy or foreclosure, new laws making it

illegal, or destruction of the property.If one of the parties to a contract dies, the contract will be binding on the heirs.If the parties to a contract agree to cancellation (mutual rescission), the contract is terminated.Default is non-performance of a duty under a contract. When one of the parties to the contract is in default, the agreement has been breached.

1031 tax-deferred exchangesThe IRS permits 1031 tax-deferred exchanges. Real estate investors can defer taxation of capital gains by making a property exchange - a trade of one business or investment property for another.An intermediary is required to hold the money from the sale of the first property until the investor finds another property to buy.As long as the investor never possesses the money, capital gain taxes are deferred until the second property is sold.An individual can have a tax-free capital gain on the sale of real property up to $250,000, if the property was the individual's principal residence for at least 2 of the last 5 years. The limit is $500,000 for a couple.In many cases, a homeowner can deduct the property taxes and the interest on a home mort- gage. Discount points and prepayment penalties on loans can also be deductible.General agencyagency gives the agent the power to bind his principal in a particular trade or business.Power to bind a principal is the power to sign a legally binding agreement in the name of your principal.The general agent's signature binds or commits the client to the agreement.Limited Power of Attorney can be used to create general agency.(Owner - Property Manager) (Broker - Sales agent)LIMITED P.O.A.One line of businessAgent to Broker PropertyMGR/Owner Fiduciary Responsibilityput the interests of your client first, give full disclosure to your client (advice and opinions in addition to disclosing all pertinent facts - both material and other,) be loyal to your principal, and be competent. (These are your duties to your client.) An agent supports and defends his client's interests.Public Responsibilityhonesty, integrity, fairness, disclosure of material facts, and accounting of funds held. (These are your duties to customers or third parties in a transaction.) An agent does not support or defend a customer's interest.LEVELS OF AGENCYBoth our employment contracts/agreements and Power of Attorney (P.O.A.) can be used to create the fiduciary or agency relationship. A person with power of attorney is called an attorney-in-fact.There are three levels of

agency:1. Universal2. General3. Special or Limited

Types of AgenciesThe Principal-Agent relationship is a fiduciary relationship.The relationship is based on trust. The COMMON LAW OF AGENCY governs the relationship between a broker and his principal. The principal is often referred to as the client.All states require the disclosure of information about agency, usually at the time of the first mean- ingful contact with a party or prospect. With a seller, this is often at the

listing presentation. With a buyer, this is often on his or her first visit to your office.RatificationIn addition to a written agreement, agency can also be created orally or by ratification. Ratification occurs when a principal accepts actions that he did not authorize.commissionOnly a broker may earn a commission and only a broker may sue to collect a commission. The broker may sue a seller who has defaulted on a listing agreement, or a buyer