California real estate sales – buying or selling a home – especially in areas such as Newport Beach and surrounding areas, has lots of paperwork and can seem overwhelming. While all documents should be diligently reviewed with your real estate professional or legal counsel, to be frank, a lot of these documents will be boilerplate disclosures from the REALTORS®, escrow, title and lending companies involved.
But there are of course key documents that you should diligently review and hang on to for tax and other purposes.
Here, we will breakdown of some of the most important purchase documents, disclosures, escrow and title documents that every buyer and seller should pay especially close attention to and keep long after the closing for legal and tax purposes.
Navigating the Newport Beach real estate market or any market involves more than just finding the perfect property at the right price. Understanding the essential documents, disclosures and tax considerations is key to a successful transaction. Your real estate professional should be able to help you navigate the entire process. Lucas Real Estate Group are real estate professionals with legal and accounting backgrounds, specializing in Newport Beach, Costa Mesa and surrounding areas.
Purchase / Sale / Disclosure Documents
Purchase Agreement – In California, chances are you will use the ‘standard form’ California Association of REALTOR® Residential Purchase Agreement and Joint Escrow Instructions, or form “RPA”, for purchase and sale of residential real estate. This is the gold standard. The now 16-page agreement (it was once 1-page, but you can imagine all the laws and lawsuits that have expanded the needed information in the modern form) makes a decent effort to provide the key information on price, terms and costs in the first few pages within a ‘grid’ showing each item. Once signed, this is the legally binding contract between the buyer and the seller for the sale of the real estate. If you are provided a different purchase agreement, the first question should be ‘why?’ The California Association of REALTOR® has forms committees and an army of attorneys that update these forms routinely based on new laws (and new lawsuits).
Natural Hazards Report or “NHD” – This shows potential nearby natural hazards such as fire zones, earthquake fault zones and the like.
Transfer Disclosure Statement or “TDS” – is a key seller disclosure document that describes the condition of the property/what is included in the property and also has several “yes” or “no” type boxes for key issues such as recent repairs, etc. The TDS and the SPQ (below) generally make up the bulk of the information the seller is disclosing.
Seller Property Questionnaire or “SPQ” – is another key document where the Seller has to identify any known issues, such as a death, water leaks, construction problems, etc. The SPQ and the TDS (above) generally make up the bulk of the information the seller is disclosing.
Agent Visual Inspection Disclosure or “AVID” – is the agent(s) visual inspection of the property and often relaying anything else the agents are aware of. Both the seller’s agent and buyer’s agent have to complete one of these forms.
Title Report or Preliminary Title report – Provided by the title company, this document details all current records and liens recorded against the property. This will show, for example, any easements or agreements affecting the property which may impact future ability for construction on the parcel.
Depending on the age of the property, you may also receive a Residential Earthquake Hazards Report or “CEHD” – is the Seller’s responses to certain questions about the earthquake safety of the property.
If there is a Homeowner’s Association, or HOA, you will also receive disclosures and documents pertaining to the association including financial disclosures. HOA funding, or lack thereof, management and anticipated repairs and assessments can be critical factors in determining if you want to ‘buy in’ to that association.
Other Disclosures
As noted, there are numerous other forms that may be provided, from ‘standard’ (and countless) REALTOR® form disclosures on market conditions, square footage, water fixtures and beyond, to brokerage disclosures, to escrow disclosures, to local area disclosures, and beyond. All such documents should be reviewed and discussed with your real estate professional or attorney as part of the purchase or sale of real estate.
Escrow / Title / Tax Documents
Closing Statement
Buyers and Sellers will receive a Final Closing Statement. Often called a Final Settlement Statement. The final closing statement is provided by escrow at closing. The final closing statement provides a picture of all the closing costs, incoming and outgoing funds in the transaction, i.e. it shows all the money in and out of the sale. The final closing statement will help determine what can be deducted from federal and state income taxes.
Tax Documents – 1099 and 593
Newport Beach sellers, and others in high appreciation areas, beware: there may be substantial tax considerations that should be discussed prior to entering into contract to sell your home. Review our article on some of these exemptions and capital gains here (link to article on real estate taxes).
Federal 1099-S
Sellers will receive a 1099, which is also sent to the IRS. The escrow officer will ask the seller to complete a Certificate for Information Reporting for the 1099-S form. The seller is required to provide their correct taxpayer identification number (social security number), the closing date of the transaction and gross proceeds of the transaction. The 1099 will reflect the full sales price, not just the taxable profit. (You will later claim any exemptions and deductions on your tax return). A hard copy of the form is included in the seller’s closing documents and a copy is sent to the IRS.
California Form 593
Sellers will complete a Form 593, which is sent to the state of California Franchise Tax Board (the California taxing authority). Similar to the federal 1099, California has a specific form that is required to be submitted to the state as part of any real estate sale, Form 593, Real Estate Withholding Statement.
However, this form is more detailed than the 1099, including an estimate of taxes actually due. Form 593 is used to: Report real estate withholding on sales; Certify the seller/transferor qualifies for a full, partial, or no withholding exemption; Estimate the amount of the seller’s/transferor’s loss or zero gain for withholding purposes and to calculate an alternative withholding calculation amount. In other words, this form is used as a preliminary assessment of any state taxes that will be due, and determine if any withholding will be due at the time of the sale.
If you do not have all of the information ready to make this determination, no worries, there is an alternative method that can be used, but that often results in a higher withholding (which can be sorted out when the final tax return is filed).
Watch Out For County Assessor Correspondence, Junk Solicitations and Scams Post Closing
Lookout for anything sent from the County Recorder’s Office or County Assessor’s Office – pay attention to these documents as you may have some supplemental property tax bills due post closing.
NOTE – after closing on the property you may get some ‘junk’ solicitations in the mail, such as companies offering to provide a copy of the recorded documents for a fee. These are mostly unnecessary solicitations (you can receive copies of all filings from your escrow company).
Contact your real estate professional with any questions.
Conclusion
There is a lot of paperwork involved in the purchase or sale of Real Estate. While all documents should be diligently reviewed with your real estate professional or legal counsel, the above documents are paramount.
Competent representation in the purchase or sale of real estate in California is essential; while getting a good price and terms is of course a main concern, there are so many legal and tax complexities in California real estate that your real estate professional should be above and beyond a simple sales agent and be able to help you navigate the entire process.
– Devin Lucas
Author Devin R. Lucas is a Real Estate Attorney, Real Estate Broker and REALTOR®, specializing in Newport Beach, Costa Mesa and Orange County coastal communities, serving individuals, Trustees and investors in residential real estate, including leasing and select local property management.
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REALTORS® and related Real Estate Law & Tax Considerations
Lucas Real Estate is a unique full-service residential real estate brokerage providing related residential real estate legal services and real estate tax considerations and planning, based in Newport Beach, California. | Devin Lucas is a licensed California Real Estate Attorney, Real Estate Broker and REALTOR® | Courtney Lucas is a California licensed CPA and REALTOR®
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