Hawaii Housing Authority v. Midkiff & the Function of Eminent Domain

Law Market Economics Eminent Domain Property
Eminent Domain

One of the most enduring myths about government in the United States is the idea that governmental behavior is more or less congruent with standards of individual morality. In other words, most Americans believe that government authority is shaped and ruled by the same moral standards which shape and rule the behavior of the average individual. Governmental behavior may have special leeway in a few instances, but for the most part it is constrained by the same principles which constrain the typical man on the street.

This idea, while not without foundation, falls well short of capturing the truth. What most people do not realize is that governmental morality is based on processes which are altogether different from those which form the basis for the morality of the individual. Individual morality is based on reciprocity, the classic notion of “give and take”: we refrain from damaging our neighbor’s property or stealing goods from our friends because we expect this same kind of treatment in return. Individual morality is an exchange, it stems from the basic idea that whatever action or inaction we take will be reciprocated by whoever is affected.

And because our government is nothing other than a massive collection of individuals, many people assume that governmental behavior must be based on this same principle. In reality, however, this is not the case, because our government does not take part in the sort of interactions in which the individual takes part. Instead of reciprocity, government behavior is based on reason, it derives from a wholly rational process involving the weighing of pros and cons and the careful analysis of possible outcomes. A good deal of the confusion about government would quickly disappear if this fact were realized.

There are various ways to show that this is an accurate statement; today, we will use the concept of eminent domain to prove our case. Relatively few property owners are aware that the government has the constitutionally conferred power to confiscate private property, and that the exercise of this power is not limited strictly to times of war. Denuded of its lofty name, eminent domain is simply a forcible acquisition of the sort which would be punishable if committed by an individual citizen. Of course, this does not speak to its propriety, but only illustrates the fact that governmental behavior operates according to different rules. Let’s take a peek at the case of Hawaii Housing Authority v. Midkiff (1984) to get a sense of the contours of eminent domain.

Facts

On the island of Oahu, 22 landowners held 72.5 percent of the land titles. This oligopoly led to a distorted market which involved inflated prices and general social discontent. One landowner (the Bishop Estates) held an unusually large portion of land. The Hawaii Legislature passed a measure designed to redistribute the lots held by the Bishop Estates to their corresponding lessees. The legislature reasoned that this transfer of ownership was in the best interests of the entire community. The measure was brought before the Supreme Court of the United States in order to determine its constitutionality.

Law

The doctrine of eminent domain arises from the Fifth Amendment to the U.S. Constitution. According to the so-called “public use doctrine,” the government has the ability to transfer title of ownership if such a transfer serves a legitimate public good.

Ruling

In an 8-0 (unanimous) decision, the Supreme Court of the United States ruled that the measure adopted by the Hawaii Legislature was constitutionally valid. The court’s decision of this case was significant because the legislature did not transfer the title of the land to the “public,” but to a larger share of private homeowners. However, though this was the case, the court determined that the legislature’s invocation of eminent domain was valid because the correction of the market conferred a substantial benefit to the general public. In other words, in order for eminent domain to be invoked, private land does not have to be put specifically to public use; it only has to confer a clear benefit to the wider populace.

Of course, circumstances will rarely compel the typical homeowner to master the finer points of eminent domain; but it is still important for virtually every homeowner – and nearly every citizen, for that matter – to have at least a basic understanding of this concept. As citizens, we have to be aware of all the functions of our government, not just those which are the most visible or common. Eminent domain may not dominate the headlines of our most popular media, but as we’ve seen it is still remarkably important.

Image credit: Nicolas Raymond

In addition to a knowledge of eminent domain, our readers who own property will also benefit from the following presentation about the tax advantages available to homeowners

United States v. Winthrop & the Test for Ordinary Income

Investment Property Real Estate Land Capital Gain
Investment Property

In our earlier article about the case of Byram v. United States (1983), we introduced the 7 pillars of capital gain treatment and discussed the recurring issue of distinguishing business sales from investment sales. In Byram, the court found the profits of multiple real estate transactions to be capital gains due to the peculiar facts which surrounded the transactions. In this article, we will discuss the specifics of an earlier case – United States v. Winthrop (1969) – in which the court rejected the capital gain classification and ruled that certain transactions were sales made in the ordinary course of business.

It is important that our readers have an understanding which is as clear as possible of what constitutes a capital gain so that they can avoid any unpleasant surprises. The facts of United States v. Winthrop contribute toward this understanding.

The case of United States v. Winthrop will also give readers a sense of the unpredictability in judicial reasoning. Prior to being heard by the Fifth Circuit Court of Appeals, the facts of this case were found to support a capital gain classification at the trial court; the Fifth Circuit actually had to overturn this finding to reach its conclusion. And given that there was no dispute between the trial court and appellate court over any matter of fact in the case, and that there were multiple potentially compelling cases cited by Winthrop, it follows that the outcome of even a strongly backed case cannot be predicted with mathematical certainty.

Facts

Over the course of a number of years, Mr. Winthrop (respondent in appellate case) inherited several pieces of real estate. Collectively, these pieces were referred to as “Betton Hills.” Mr. Winthrop inherited his first piece of land in 1932, and he began to develop that same piece a few years later in 1936. Mr. Winthrop inherited additional pieces of land at various other dates (1946, 1948 and 1960).

In 1936, Mr. Winthrop made his first sale by selling a portion of the land he had began developing earlier that same year. Mr. Winthrop continued to develop his land and sell portions of it to interested buyers up until his death in 1963. Hence, his sales operation spanned multiple decades. Though he did not create a business office, he devoted massive amounts of energy to developing the land so as to make it more marketable. What’s more, the income derived from real estate sales constituted the majority of his entire income for many years prior to his death. Mr. Winthrop also began to include “real estate” as his occupation for a number of years in official documents before his death. The question before the court was: should Mr. Winthrop’s activities receive capital gain treatment given the facts which underlay them?

Law

There are a number of common law tests which have been developed to aid the court in its determination of capital gain treatment. Though this is true, the court must also be certain to view each case as an independent matter and provide each case with its own analysis.

In United States v. Winthrop, there was no disagreement made by the Fifth Circuit regarding the fact that the land was held “primarily for sale” by Mr. Winthrop. The only remaining issue was whether the sales executed could be classified as sales made in the ordinary course of business. The Fifth Circuit stated that the ordinary course of business determination depends on whether selling the land was Mr. Winthrop’s primary purpose in holding the land.

Ruling

The Fifth Circuit overturned the trial court’s finding and determined that the sales made by Mr. Winthrop were made in the ordinary course of business and therefore should be disqualified from capital gain treatment. Mr. Winthrop clearly had a reasonably strong case given that he did not actively and aggressively advertise his properties, he did not maintain a sales office, did not reinvest his profits in other real estate (for the purpose of growing his business) and he initially acquired the real estate through inheritance rather than purchase. There were certainly many facts capable of supporting his position. Ultimately, the fact that Mr. Winthrop only used the properties for the purpose of selling to customers proved to be decisive.

Image credit: Mark Moz

Byram v. United States & the 7 Pillars of Capital Gain Treatment

Real Estate Property Transaction Sales Business
Real Estate Transactions

The tax code draws a distinction between ordinary income and income derived from the sale of a capital asset, or “capital gain.” In most instances, this distinction is straightforward and there is little confusion about whether income falls into one category or the other. Every now and then, however, a situation develops in which the classification of income is a difficult matter. There is much at stake in the determination of whether income is either ordinary or derived from the sale of a capital asset: capital gains can be taxed at substantially lower rates than ordinary income.

The case of Byram v. United States (1983) provides one example of the difficulty occasionally involved in distinguishing between a “business” sale – which would trigger ordinary income – and an investment sale. The tax code recognizes a number of general characteristics of business sales and investment sales; sometimes a transaction possesses characteristics of both a business sale and an investment sale, or it lacks enough characteristics of one type of sale to merit a definitive classification.

If you engage in real transactions with any kind of regularity, be sure that you’re aware of these characteristics so you can avoid any unpleasant surprises when tax time rolls around.

Facts

John Byram owned multiple pieces of real estate. Between the years 1971 and 1973, Byram sold a total of 22 pieces of real estate for a gross return of $9 million and a net profit of $3.4 million. He sold 7 pieces of real estate in 1973 alone.

Importantly, Byram did not have a business office; he did not advertise; he did not utilize the services of a broker; he did not subdivide the land; he spent only a small amount of time and effort engaging in the transactions; all of the transactions were initiated by the purchasers.

Law

The question of whether a transaction – or set of transactions – can receive “capital gain treatment” (and therefore be subject to the rates applicable to capital gains) depends on the characteristics of the transaction. Courts recognize the 7 “pillars” of capital gain treatment when deciding whether a given transaction should be deemed either an investment sale or business sale.

The 7 Pillars of Capital Gain Treatment can be summed up as follows: (1) purpose of the acquisition of the property and duration of ownership; (2) extent of the efforts to sell the property; (3) number, extent, continuity and magnitude of the sales; (4) time and effort devoted to developing the land and advertising to increase sales; (5) use of a business office; (6) degree of supervision exercised by the owner over any representative selling the property; (7) overall time and energy dedicated to the sales.

The question before the court was: do the transactions made by Byram between 1971-1973 merit capital gain treatment based on the guidelines established through the 7 pillars?

Ruling

The court (the Court of Appeals for the Fifth Circuit) affirmed the ruling of the lower court in favor of Byram. The transactions engaged in by Byram (and his buyers) possessed enough characteristics of an investment sale to trigger capital gain treatment. The determination of whether capital gain treatment is warranted requires an independent analysis for each individual case; in the Byram case it was clear that the evidence supported the conclusion that the properties were not sold as part of a business enterprise but as investments.

The Byram case is highly useful for people who own multiple pieces of real estate and who are considering selling these pieces in the future. It is important for these owners to be conscious of the facts of Byram so that they can be certain to receive capital gain treatment.

Image credit: PT Money

Readers who enjoyed this essay should check out our presentation of the tax benefits of real estate ownership by CPA Jessica Chisholm

Property Law Terminology: Fee Simple & Fee Tail

English Property Law Real Estate
Property Law

As we have discussed before, American law descends from English law, and as a consequence many of our legal concepts and much of our legal language are borrowed directly from this source. This is perhaps most evident in our law of property. Much of our property law nomenclature derives straight from medieval English society. Today we will cover two terms which both take their origin from feudal England: fee simple and fee tail.

One of the overriding concerns of real property owners is the successful transmission of ownership to their property. To address this concern, our law of property has a variety of devices which are intended to assist property owners transmit their property in exactly the manner they wish it to be transmitted. Fee simple and fee tail are two such devices.

Fee Simple

A fee simple is an ownership interest which confers upon its holder full control over the future disposal of the land with which it is associated. Hence, an individual who has a fee simple not only has a present ownership interest but also may decide who acquires ownership interests in the future. A fee simple with no restrictions whatsoever is referred to as a fee simple absolute. A fee simple absolute confers an interest which is unlimited and may not revert back to the grantor under any circumstances.

It is possible for a grantor to place restrictions on a fee simple. One common reason for this would be to ensure that a piece of property is used for a specific purpose; another reason would be to prevent a grantee from engaging in a particular type of behavior. A restricted fee simple is referred to as being either a fee simple determinable or fee simple subject to a condition subsequent.

Historically, to create a fee simple absolute, the grantor needed to use particular language. This language was as follows: “To the grantee and his heirs.” These words needed to be present or else a smaller estate was transferred.

Fee Tail

In contrast to a fee simple, a fee tail necessarily restricts the ability of the grantee to transfer title of the land in the future. Traditionally, the underlying purpose of a fee tail was to prevent property from falling into the hands of persons who were not direct descendants of the original grantor. In other words, a fee tail was a mechanism created to maintain family wealth over successive generations.

To create a fee tail, the grantor had to use language such as the following: “To the grantee and the heirs of his body.” This language prevented the grantee from disposing of the land at will and automatically transferred ownership interest in the land to a direct descendant. Unlike a fee simple, therefore, a fee tail granted present possessory rights but did not allow the grantee to control the future direction of the land.

As mentioned earlier, these concepts are archaic and have roots which stretch back all the way to feudal England. However, it is still important to be aware of them as they contributed heavily to our modern law of property.

Image credit: Jo@net

Property owners looking to maximize their pocketbooks should take a moment to view this video on the tax benefits of property ownership

Murphy v. Financial Development Corporation: The Importance of Due Diligence

Mortgage Loan Due Diligence Lender
Mortgage Loan

No one who procures a mortgage loan ever wishes to fail to fulfill their financial obligation to the lending institution. However, it does happen that a person with a mortgage – known as a mortgagor in legal lingo – becomes unable to consistently make payments to their lender. There can be any number of reasons as to why this may happen: for example, a job loss can suddenly turn an otherwise good mortgage into a troubled one very quickly. Sometimes, a mortgagor can repair a mortgage loan by working out an agreement with the lender. But if such an agreement between the mortgagor and lending institution cannot be reached then the mortgagor will inevitably face foreclosure.

However, what not everyone realizes is that lenders are still obliged to act within certain ethical bounds even after a foreclosure has been implemented. All lenders – or “mortgagees” – must conduct themselves with “good faith” and exercise “due diligence” to see that the adverse impact of the default is kept to an absolute minimum. Failure to abide by these ethical standards is a serious issue and transgressors can face severe penalties. When a default occurs, mortgagees must try to reach an outcome which fairly settles the matter, they cannot simply view the default as an opportunity to enrich themselves.

The case of Murphy v. Financial Development Corporation (1985) provides a sense of what due diligence requires from a lending institution. This is a case which all mortgagors should be aware of, even those who figure they have not the slightest chance of ever falling into financial trouble.

Facts

The plaintiff (Murphy) suffered a job loss in early 1981 and fell behind with making payments on his mortgage loan. The plaintiff attempted to negotiate with the defendant (Financial Development Corporation) in order to repair the loan. However, the plaintiff was not able to successfully repair the loan and eventually the defendant sold the house at auction to one of its representatives in December of 1981.

The plaintiff had approximately $19,000 of equity in the home and owed roughly $27,000. The defendant sold the house to its representative for $27,000. Immediately following the sale to its representative, the defendant sold the house to a new buyer for $38,000. Hence, the initial sale of $27,000 to the defendant’s representative had the dual effect of making the defendant “whole” while failing to account for the plaintiff’s substantial equity. At the time of the auction, the house had a market value of around $46,000.

Though the defendant clearly acted in good faith by negotiating with the plaintiff and giving the plaintiff an opportunity to repair the mortgage, the question before the court was whether the defendant acted with due diligence by selling the house to its representative.

Law

Whether a mortgagee has acted with due diligence when selling a house which has been foreclosed upon requires a case-specific analysis. In general, due diligence requires that a mortgagee expend reasonable effort to obtain a fair price for the property.

Ruling

The court (Supreme Court of New Hampshire) upheld the decision reached by the trial court and ruled in favor of the plaintiff. The court determined that, in this instance, the defendant had acted in good faith but failed to exercise due diligence. The court based its decision on the following facts: the defendant put only a small amount of effort toward advertising the auction; the defendant did not place a minimum bid at the auction; the defendant accepted an offer substantially below the market value of the property; and the defendant immediately sold the property to a new buyer for a quick profit.

As mentioned before, the determination of whether due diligence has been exercised is a case-by-case analysis. In this case, though the defendant acted in good faith, it was clear that not enough action was taken in order to meet the requirement of due diligence.

All mortgagors need to be aware of this fact: even if you fall behind on your payments, you still need to make certain that your lender conducts itself according to prevailing ethical standards.

Image credit: cafecredit

Here at Huddleston Tax CPAs we spend a great deal of time focusing on issues which affect property owners. To learn more about the tax benefits of property ownership view the following video

Choose Tenants Wisely: The Case of Reid v. Mutual of Omaha Insurance Company

Rental Property Real Estate Tax
Rental Property

It is well known that acquiring property for the purpose of renting to tenants is a potentially highly lucrative endeavor. Rental property can yield enormous financial benefits to property owners, and these benefits can be even greater when owners are equipped with adequate tax knowledge. Huddleston Tax CPAs encourages rental property owners (and future owners) to peruse our material on this topic. If obtaining rental property is within your contemplation, however, it is important to consider that owning such property frequently presents complications. Things do not always go smoothly, and there are snags which can be a severe drain on your supply of mental and physical energy. The case of Reid v. Mutual of Omaha Insurance Company (1989) is a telling example of the sort of headache which can result from owning rental property.

Of course, this case is not intended to discourage rental property ownership. But future owners should certainly be aware that hassles such as the kind in Reid v. Mutual of Omaha Insurance Company are fairly common. Rental property ownership can be extremely rewarding, but it involves a great deal more than just collecting rent checks!

Facts

Reid (the plaintiff) contracted with Mutual (the defendant) to rent out a piece of office space for a period of five years. Mutual was supposed to pay Reid a monthly rent of $1100. Approximately two years after the five year lease was signed, another company, Intermountain Marketing, moved into the adjacent space. Mutual made a formal complaint to Reid about the behavior of Intermountain. Mutual claimed that Intermountain was too noisy and that Intermountain employees were using up all of Mutual’s allotted parking spots. Reid failed to adequately address Mutual’s complaint and as a consequence Mutual moved out of the office space and ceased paying rent. Soon after Mutual’s departure, Intermountain expanded into Mutual’s former space and effectively took over Mutual’s lease. However, Intermountain soon went bankrupt and then exited the space.

Reid sued Mutual and argued that Mutual’s failure to pay rent constituted a breach of contract. Mutual argued that Reid’s failure to address Intermountain’s troublesome behavior constituted a “constructive eviction” and therefore Mutual’s contractual obligation was released. Mutual also claimed that Reid had a duty to mitigate any resulting losses from the alleged breach and that Mutual was only liable for a portion of the losses as a consequence.

Law

When a contract has been breached, the breaching party is not necessarily liable for all losses which follow from the breach. The other party of the contract has a duty to mitigate, and the damages which are recoverable are limited to those which were unavoidable despite reasonable effort to mitigate.

Ruling

The court (Supreme Court of Utah) ruled in favor of the plaintiff, but determined that the plaintiff was not entitled to the full value of the lease because the breach triggered a duty to mitigate. The plaintiff could only recover a sum which represented losses which were deemed unavoidable even after reasonable attempts to mitigate.

Reid v. Mutual of Omaha Insurance Company offers a very important lesson for future rental property owners: even with a long-term lease, unpaid rent is not always recoverable. Cases such as this one emphasize the importance of choosing tenants with extreme care!

Image credit: REIC Vietnam

View the following video to learn more about the tax benefits of real estate ownership

Conklin v. Davi: Adverse Possession and Marketable Titles

Real Estate Adverse Possession Title
Real Estate

Huddleston Tax Weekly will continue to examine legal cases which involve real estate because such cases can be of substantial value to our readers who are either current or future property owners. When engaging in real estate transactions, it is always best to draw up a contract which captures every conceivable detail of the exchange. Developing a thoroughly detailed contract will help to avoid the possibility of any legal disputes. The case of Conklin v. Davi (1978) is an interesting example of a dispute which could have been avoided if the parties had created a more detailed contract.

Facts

Conklin (the plaintiff) sold real estate to Davi (the defendant). A section of the property was acquired through adverse possession. Adverse possession is the process through which real property may be obtained without a monetary transaction; adverse possession occurs when an individual actively and openly “possesses” land for a specified period of time. The contract between the parties omitted reference to the fact that a portion of the land was acquired through adverse possession. Davi wished to obtain a title which was wholly “marketable” so that the land could be sold again in the future without complication. Davi believed that a marketable title could not be gained through the transaction due to the fact that a piece of the land had been acquired through adverse possession. Based on this belief, Davi refused to conclude the transaction. Conklin sued for specific performance and Davi counterclaimed for rescission of the contract.

Law

The critical issue before the court was whether land acquired through adverse possession can have a marketable title when transferred via sale. The answer is yes: provided that the seller shows proof that the land was acquired legally through adverse possession, the buyer is capable of obtaining a title which is wholly marketable.

Ruling

The court (the Supreme Court of New Jersey) ruled in favor of the plaintiff (Conklin). The defendant could have procured a marketable title to the entire land as long as the plaintiff provided proof of ownership through adverse possession. The court ordered the plaintiff to provide such proof before suing the defendant for specific performance.

As Conklin v. Davi shows, land acquired through adverse possession can yield a wholly marketable title. The issue was that the plaintiff did not provide proof of ownership when the contract was formed; another issue was that the parties were unaware that adverse possession could produce a marketable title. The lesson is clear: before selling or buying real estate, be sure to conduct research and develop a sufficiently detailed contract!

Image credit: Emmanuel Ku

To learn more about the tax benefits of real estate ownership view the following webcast

Vancouver’s Latest Tax May Impact Seattle Real Estate Market

Seattle Real Estate Market Prices
Seattle Real Estate Market

Though the Seattle real estate market is attractive on its own merits, a recent tax issued in Vancouver, Canada may create even more demand in the Seattle housing market. In recent years, foreign buyers have caused housing prices in the Vancouver market to rise substantially. In response, the city (of Vancouver) implemented a tax to help stabilize the market. Some observers speculate that new tax will push foreign home buyers south toward Seattle. Let’s take a look at the facts and develop an informed view of the matter.

Foreign Buyer Transfer Tax

The new tax – which is known as the Foreign Buyer Transfer Tax – applies specifically to foreign buyers in the Vancouver housing market. Whenever a foreigner purchases a piece of Vancouver real estate they must pay an additional 15 percent on top of the home price. The tax took effect on August 2nd of this year.

Because little time has passed since the implementation of the tax, predicting its long-term impact is not an easy task. However, it seems likely that foreign real estate buyers – who are predominantly Chinese – will look toward Seattle simply because of the large disparities in home prices between the two markets. In August, the benchmark home price in Vancouver rose to $1.57 million; in Seattle the median home price is $625,000. It seems reasonable to predict that the new Vancouver tax will create an additional incentive to migrate south on top of other incentives which already exist.

Since August, investment in the luxury real estate market of Vancouver has declined by approximately 20 percent. Whether this decline is attributable specifically to the new tax is not fully clear. Along with Seattle, foreign buyers will probably also look toward Toronto.

Possible Impact on Seattle Market

As of right now, there is relatively little hard evidence to support the idea that the Vancouver tax will lead to a stampede of foreign investment in the Seattle real estate market. In fact, there are some data which may suggest a decline in foreign investment. As a general matter, tracking foreign investment is a difficult task, but one way to obtain an imperfect sense of foreign investment trends is to look at cash sales. Cash sales may reflect foreign investment trends to a degree because many (though not all) foreign buyers pay in cash because they are unable to obtain financing in the U.S. But, as it turns out, cash sales have actually declined in Seattle in the past several years. Though this is not conclusive evidence, it tends to throw doubt on the migration hypothesis.

Even without a pile of solid evidence surrounding it, the Vancouver tax has still managed to catch the attention of the Seattle political establishment. Seattle officials are very concerned about keeping housing prices affordable and the potential impact of the Vancouver tax has already sparked discussion about policy considerations. However, it seems certain that no measures will be adopted until there is more firm data on the effect of the tax.

The new Vancouver tax is an interesting example of a city taking action to stabilize its housing market. But at this point it appears that the idea of this tax creating a veritable avalanche of foreign investment in Seattle is almost pure speculation.

Image credit: Philip Taylor

If you’re curious about various tax strategies which can help you save money as a property owner you should view the following presentation by our CPA Jessica Chisholm

Basic Facts of Cost Segregation

Cost Segregation Study Tax Reporting
Cost Segregation

Cost segregation is a process which involves separating personal property assets from real property assets for the purpose of shortening the time of depreciation and reducing tax liability. In a cost segregation study, assets are classed together according to their depreciation period. Cost segregation has the potential to save building owners large sums of money because it enables certain costs to be depreciated over a much shorter period of time (5, 7 or 15 years) than they normally would be (27.5 or 39 years).

Personal Property Assets

Certain elements of a building may be categorized as the “personal property” of the owner as opposed to real property for tax purposes. For instance, non-structural elements – such as wall covering, carpet, lighting, certain parts of the electrical system and others – may be categorized as personal property in most instances. Certain types of land improvements – such as landscaping and sidewalk improvements – may also be categorized in this manner. When categorized in this fashion, these elements will have relatively shorter “useful lives” than they otherwise would have, and consequently owners may have a reduced tax burden and may take advantage of depreciation deductions.

Typically, cost segregation studies are financially prudent for buildings which have been bought or remodeled for over $200,000. Cost segregation studies can be performed on any building which has been bought, constructed, expanded or remodeled since 1987. Hence, studies can be performed “retroactively” on buildings which are not newly completed.

Cost segregation can be a tremendous positive force for business owners as it can give them access to cash much more quickly than would otherwise be possible. In the world of business, timing is of immense importance, and so taking earlier deductions can literally alter the whole direction of a company’s long-term future.

Cost Segregation Studies

The IRS scrutinizes cost segregation studies very thoroughly. This is because such studies can – and frequently do – translate into many thousands of dollars in tax savings. When hiring someone to perform a cost segregation study, it is important that your hire be well-informed not only on the relevant architectural and engineering specifications but also on the applicable law. Simply hiring a construction engineer or architect with no prior experience with cost segregation analysis is unadvisable. There are heavy penalties imposed by the IRS when cost segregation is used improperly and so it imperative to hire a qualified specialist to perform the analysis.

Image credit: vaugi

As we’ve seen, cost segregation has the potential to save business owners lots of money. To learn more about cost segregation, curious readers should view the following presentation by Huddleston Tax CPAs principal and founder, John Huddleston

Greiner v. Greiner: Be Careful with Promises

Real Estate Houses
Real Estate

Promises which are made among family members very rarely end up involving the legal system. But those which do tend to offer valuable lessons which, if heeded, can help people avoid considerable hassle and headache. The case of Greiner v. Greiner (1930) is an interesting example of a promise made between family members gone awry. Though the peculiar facts of Greiner are highly unlikely to be replicated today, the case still gives useful information for those who are considering giving something of great value away to a family member or close friend. Real estate owners in particular should pay close attention so that they can avoid the ordeal which the Greiner family had to experience.

Facts

Mrs. Greiner inherited a large piece of land following the death of her husband. She made a promise to her son, Frank Greiner, which allowed him to have a small portion of this land provided that he move his family onto the land and live there indefinitely. In direct response to this promise Frank Greiner moved onto the property with his family. Over time, Frank Greiner made improvements to the property and eventually asked Mrs. Greiner for a deed. Mrs. Greiner refused to give the deed and soon thereafter brought suit against her son in the hope of forcibly removing him from the premises. Mrs. Greiner argued before the court that a valid contract had not been made and therefore forcible removal was warranted; on the other hand, Frank Greiner argued that he had relied on the promise extended by his mother to such an extent that forcible removal would be unjust.

Law

Though a valid contract had not been made because no consideration was exchanged, the rule of promissory estoppel was still triggered by the offer given to Frank Greiner. The doctrine of promissory estoppel states that when a person reasonably relies on a promise to their detriment that promise may be enforceable by law in order to avoid injustice.

Ruling

The court (Supreme Court of Kansas) ruled that the doctrine of promissory estoppel applied given the facts of the case. It was reasonable to expect that Frank Greiner would uproot himself, move his family onto the property and then make valuable improvements to the property because of the promise made by Mrs. Greiner. And since he reasonably relied on the promise in this manner the promise should be enforceable by law. The court granted the land to Frank Greiner.

As Greiner v. Greiner illustrates, one has to be very careful when making promises which involve things of exceptional value. This is true even when the promise is made among family members. If you’re a real estate owner, be very careful before you promise any part of your land to someone else!

Image credit: woodleywonderworks

Though property owners do have to be careful with their promises, real estate ownership still carries plenty of benefits. Current and future owners should view this presentation on tax savings in order to fully capitalize on their ownership