It’s important for real estate professionals to go the extra mile for clients. But where do you draw the line? While you (of course) want to be a trusted resource during your clients’ home sale/purchase, you can’t be everything for them. In fact, agents and brokers often end up facing a real estate lawsuit when they ”over-support” in certain situations.
One situation is answering tax questions from real estate clients and sharing or distributing third-party tax information. Taxes and other legalities are invariably a part of any real estate process, but most U.S. states make it illegal for real estate professionals to answer tax questions.
Understanding how to handle these situations is essential to both avoid a real estate lawsuit and continue to develop strong client relationships while maintaining a reputation for first-class service and client support. Here’s how:
Be Aware: What Types Of Tax Questions Might A Buyer or Seller Ask?
There are numerous possibilities, including:
How much of a mortgage is tax-deductible?
If I sell my home this year, will I be subject to capital gains tax?
How do points work on refinancing?
Is a short sale going to affect my taxes?
What expenses can’t I deduct from my income?
Obviously this is just scratching the surface. Many people buy or sell a home specifically for tax reasons, so they are typically going to have a lot of questions.
What You Should and Shouldn’t Do with Legal and Tax Questions
The major lawsuit types that come against real estate professionals involve misrepresentation or failure to disclose. Unauthorized practice of law (which covers taxation questions) is discussed in Article 13 of the National Association of Realtors® (NAR) Code of Ethics, clearly stating that Realtors® should not engage in, “…the unauthorized practice of law.”
What this means has shifted over the years, but generally Realtors® are able to do things like fill in the blanks of pre-printed sales agreements once approved by an attorney. They cannot, however, draft legal documents or give general legal advice, and tax questions fall in this category.
It’s important for you to research your own state real estate laws. It’s also helpful to build relationships with tax professionals and lawyers. For example, in California there are a variety of contexts in which real estate agents can safely disclose some tax information. An agent may know about the separate income and profit categories for different types of real estate, how depreciation schedules and cost recovery deductions work, and about interest deductions on mortgages. In those situations, the agent is protected when answering questions.
CRES can help on the legal front with our ClaimPrevent® Legal Hotline for E&O clients
In broader context, because of 1993 Carleton vs. Tortosa, on a direct inquiry from the seller or buyer, the real estate agent has to respond honestly and to the best of his/her knowledge. That follows up on 1985 California legislation dictating that real estate professionals can provide tax information based on past client experience, but all information must fall under “not misleading” the client. An agent must be clear they are only sharing a past example and explain that the situation is not indicative of the particular client’s possible outcome or situation.
What’s Your Liability if You Answer Questions?
If you give your clients tax advice you may be sued, have a claim on your record, and potentially lose your license. The most common repercussion, even after a settlement, is a negative image in the marketplace and decreased referrals.
The National Association of Realtors® has a number of case studies on what happens as a result of various ethical violations. The repercussions are serious. These case studies also include advice on what you should do when addressing legal or tax questions from clients,
Take Action: What Real Estate Professionals Must do When Pressed for Tax Advice
It can vary slightly by state, but the general best practice is to refer your clients to their lawyer or tax professional. If they don’t have one, suggest a few that you’ve worked with before. Explain to clients that while you have worked on many deals for other clients and have an understanding of some tax implications, a tax professional will be able to answer their questions directly. And the tax professional may understand the their overall financial situation better than you.
To reduce your risk of a real estate lawsuit, defer specialized or legal questions in the home buying/selling process to an individual licensed in those specifics. Create a written record that you notified your client to seek independent guidance.
Unsolicited Tax Advice: How to Share Third-Party Resources Without Increasing Liability
If you have documentation (such as a chart of information or article about tax laws prepared by a third party) that you believe will be helpful to your client, you can share that information with them by doing the following:
Share the full article or document in writing and keep a copy of the shared document and correspondence in the client’s transaction file. Email or hardcopy is acceptable.
State in writing that you are not a tax expert and encourage the client to seek professional tax advice.
Discuss third-party information by clearly stating that as a real estate professional, you are not a tax expert. Always encourage clients to seek professional advice. Document these discussions in writing in the client’s transaction file.
Do Not Summarize: Share and Distribute Full Sources, Not Your Interpretation
From a risk management perspective, the summarization of any tax information in an agent’s newsletter, blog post, website, or in an email is extremely risky. The summary may not be entirely accurate, and inaccuracy may lead to a claim down the road. Provide a link to a full article in an email format sent directly to the client for documentation purposes. Mentioning why you think the information is helpful is fine, as long as you don’t make definitive statements around how clients should interpret the information.
Best Practices for Avoiding Claims Based On Tax Advice
If you’re insured with CRES, you can contact CRES ClaimPrevent® Legal Advisory Services seven days a week to help you during or after any real estate transaction. This will begin with a “stress less” hotline phone consultation, but can also move to document review, written attorney responses to send to clients, and more. Our trusted team of legal professionals will give you advice on the next steps to support your clients while protecting yourself from a real estate lawsuit.
What kinds of tax questions do your clients ask you? Tell us in the comments below.
This blog/website is made available by CRES Insurance Services for educational purposes to give you general information and understanding of legal risks and insurance options, not to provide specific legal advice. This blog/website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Claims examples are for illustrative purposes only. Read your policy for a complete description of what is covered and excluded.