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Landlord buyouts of Rent Regulated Apartments

PostPosted: Tue Apr 16, 2013 10:47 am
by TenantNet
When landlords offer buyouts to tenants of rent regulated apartments, the money received by the tenant is typically considered a long term capital gain for tax purpose.

In addition, while it is advisable to have an experienced attorney negotiate the actual buyout, the agreement with the attorney might require that up to one-third of the total amount be paid to the attorney for his or her services.

If the tenant is represented, the tax liability could depend on whether the check from the landlord goes first to the tenant, or to the tenant's attorney. From what we've heard, if the check goes first to the tenant's lawyer, he/she takes their cut and sends the remainder to the tenant, who is then liable for taxes on the amount less the attorney's fee.

But if the check goes to the tenant, and the tenant pays the attorney, then the tenant would likely be liable for taxes on the entire amount.

Either way, it's good to get professional advice. While it is always advisable to consult with a tax attorney on tax issues -- and beyond the scope of a landlord/tenant forum -- we have obtained some material that can be useful.

PostPosted: Tue Apr 16, 2013 10:49 am
by TenantNet
New York Times
Published: July 13, 1986

Tax on a Co-op Buyout

Question: I live in a building that is about to be converted to a cooperative. The sponsor is offering to buy out tenants who are willing to give up their leases and leave. Will this money be taxed as regular income or as a capital gain? If I were to reinvest the money in another residence would the same tax rules apply? Are the elderly exempt from this tax? . . .
M. R., Brooklyn

Answer: The Internal Revenue Service will tax the income you receive in a buyout as a capital gain in accordance with the Internal Revenue Service Code, Section 1241.

According to Anita Ireland, a spokesman for the Manhattan office of the I.R.S., there are no provisons in the law that would exempt you from this tax if you are elderly or if you reinvest it in another residence.

PostPosted: Tue Apr 16, 2013 11:01 am
by TenantNet

Re: Landlord buyouts of Rent Regulated Apartments

PostPosted: Sat Sep 22, 2018 9:32 pm
by TenantNet
Note: The Law Firm of Wagner Berkow is portrayed in this article as a law firm that is friendly to tenants. While we do not object to anything stated in the article, we do not know if this law firm is a tenant firm, or not. We do not know as we have never heard of them.
Why should I hire a lawyer to negotiate a buyout from my rent-stabilized apartment?
SEPTEMBER 19, 2018 - 10:00AM

I've seen ads for services that help rent-stabilized tenants negotiate buyouts, and they make it sound like there's no need to hire a lawyer. What can a lawyer do that one of these operations can't?

There are indeed firms pitching the expert advice of real estate brokers to help renters negotiate a buyout. The argument is that as real estate professionals, they are best positioned to negotiate such a deal (wherein a tenant relinquishes his or her coveted rent regulated apartment for money so that the landlord can hike the rent), better positioned even than a real estate lawyer.

"I disagree with that strongly," says Steve Wagner, a real estate lawyer and partner at the firm Wagner Berkow, with decades of experiences representing co-op and condo owners and boards, as well as tenants. "There are a patchwork of laws, regulations, and codes that come into play when you're negotiating a buyout, and the case law is fluid as well. You need someone who is on top of these things."

"These are lawyer issues," he continues. "These are not broker issues."

If you hire someone who's not familiar with tax law, for example, "your likelihood of getting audited goes up dramatically," Wagner says. A lawyer will also scrutinize the fine print of the agreement to be sure that you're not still on the hook for the lease of the apartment you're leaving, or if you're agreeing to be relocated, that there's not something hidden in the terms that will force you to leave that place before you're good and ready.

A knowledgeable lawyer can also put the buyout money in escrow, to keep your landlord from holding onto some or all of it once you've moved out.

"Lawyers are best suited to set up escrows," Wagner says. "We put our licenses on the line every time we set up an escrow. We're held to very high standards."

Nor do you want to hire just any lawyer if you're considering a buyout. When interviewing attorneys, Wagner recommends asking if they have experience representing tenants, if they have experience negotiating with developers and landlords, and how familiar they are with tax issues. What many tenants don't realize when they're dreaming of buyout dollar signs is that buyouts are subject to taxes. Plus, it's easy to forget the money it costs you to move and the continuing housing costs wherever you end up.

In addition to helping clients structure the transaction to minimize the tax hit, Wagner says his firm helps tenants plan financially, "to ensure that we are not putting someone in a situation they're not going to be able to afford."

And at least for Wagner's firm, they are typically paid on a contingency fee basis, meaning you don’t pay lawyer fees unless and until you receive the money in a buyout.

Another highly technical piece of the puzzle that Wagner says not everyone is equipped to figure out is whether the apartment is stabilized in the first place (a landlord may argue it's not when it is) and what the rent should be. Also, hidden in the property records for your building and neighboring ones could be the making of a big air rights deal that would mean your apartment is worth exponentially more to the building owner than you thought. Yes, a lawyer costs money, but the research a good one does could mean a significantly larger buyout amount in the end.

"I have seen this where people leave enormous amounts of money on the table," Wagner says. "They see the number they want to put in their pocket, not realizing that the landlord is going to negotiate no matter what. They're waiting to hear a number from you, and on your own you may give a number that's even less than what they were willing to offer."

And finally, a buyout agreement is fundamentally a legal document. Given that, it's a good idea to have a legal professional scrutinize it, to reduce your risk of ending up in court when some piece of it turns out to be not as it seemed. And if the situation does go south, the real estate professionals aren't going to be there to advocate for you.

"Say there is an issue," Wagner says. "The broker isn't going to represent you in court and continue to negotiate."

New York City real estate attorney Steven Wagner is a founding partner of Wagner | Berkow with more than 30 years of experience representing numerous co-ops, condos, and individual owners and shareholders. To submit a question for this column, click here. To ask about a legal consultation, send an email or call 646-791-2083.