Robert E. Muir

110 West A Street, Suite 625, San Diego, CA 92101-3707 (619)231-6500

Disclosures and the TDS: Which Transactions are Exempt?

By: Robert Muir, Attorney

Questions have arisen recently about what transactions are exempt from the Real Estate Transfer Disclosure Statement (TDS) law under California Civil Code §1102. Apparently, at some seminars agents are being taught that if an investor creates a limited liability company ("LLC") to sell residential property or uses the LLC as the trustee of a trust, the seller does not need to give the buyer a TDS. However, this exemption is doubtful.

The TDS is required in the sale of one to four residential units as well as transfers by exchange, installment land sale contract, lease with an option to purchase, option to purchase, or ground lease coupled with improvements.

Transfers of property that are exempt under Civil Code §1102 include new home sales requiring a public report, transfers pursuant to court order such as probate sales, transfers by foreclosure including deeds in lieu of foreclosure, and transfers by a fiduciary in the course of the administration of a decedent's estate, guardianship, conservatorship, or trust. However, when the property is held in a revocable trust and the trustee is a natural person who is the sole trustee of the trust as well as the former owner of the property, or an occupant in possession of the property within the year preceding the transfer, the TDS is required.

Other exemptions from the TDS include transfers from one co-owner to another, transfers made to a spouse or child, grandchild, parent, grandparent or other direct ancestor or descendent; transfers between spouses in connection with dissolution of marriage, and various transfers to the state for failure to pay property taxes and other circumstances.

The attempt to find a technical "loophole" to avoid providing the buyer with the TDS, and other disclosures, places the seller and agent at risk of liability. The transfer disclosure law is intended to protect buyers so that they can be apprised of material issues that affect the property. To circumvent the law by using a LLC will likely be viewed skeptically by the courts. Moreover, in addition to the TDS statutory requirements, California court decisions as well as the purchase agreement require that the seller disclose material facts about the property.

Caution should be used if the seller claims to be exempt from providing the TDS or other disclosures, except where there is a clear exemption. The best protection for the seller as well as the agent is for the seller make a complete disclosure of the property, rather than using an LLC or other device to attempt to be exempt from the TDS requirements.

This article, with modification, was published in The San Diego Realtor in October 2009.