Legal Question in Real Estate Law in Massachusetts
Buy out price
What is the proper way to calculate the value of an undivided interest in real estate for purposes of a buyout? Would it be proper to deduct sales commissions and other sales costs and make adjustments for capital gains taxes in arriving at a fair buyout price?
Assume that the property is worth $200,000 in the market place (based on a sale from a willing seller to a willing buyer, not under compulsion to sell/buy) and that sales commissions typically run about 6% and other sales costs total 2% of the sale price. Would it be proper to deduct the 8% ($16,000) from expected sale price to arrive at a buyout price? Assuming a mortgage bal. of $100,000 the resulting net proceeds from a sale would be $84,000.
Next, is the capital gains issue. Assume after a sale, capital gains of $20,000 would be owed. Is it proper to deduct this amount to arrive at the true net equity that exists in the property? In this example, we would deduct $20,000 from the $84,000 about and end up with net equity of $64,000. If each owns 50% interest, would $32,000 be the fair buyout price?
Do courts normally allow such adjustments for sales commissions and sales costs to arrive at a fair buyout price or the value of an undivided interest?
1 Answer from Attorneys
Re: Buy out price
There are some key pieces of information missing in your question. Is this a buy-out of an investment or as part of a divorce? The answer would affect the advice given. I will assume this is an investment matter.
If you are buying out a partner, there is no precise way required unless it is by partition, a formal legal process. One way of looking at the buy-out value is to value the property and deduct the costs if the property sold normally and then prorate the balance. Using your example, $200,000 less 8% less 100k Mtge leaving $84,000 and assuming your partner owned half they would be entitled to $42,000. he would be responsbile for his own capital gains taxes. You would gain additional basis. This all assumes no excess depreciation, you are not a corp or an entity that impacts tax calculations. Also, no discussion of State taxes is included here which need to be reviewed as well.
If you are looking for a fair process. The fair process is value the property deduct limited expenses, the debt and pay the proportional balance to the other party. The Capital Gains Tax is the obligation of the Seller on his or her gain. you should obtain a stepped up basis.
This assumes again no corp entity, no discussion of MA Tax implications, no review of excess depreciation recapture or any other item that would impact the above-description.
If you have any questions about my answer please feel free to contact me.
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