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May 21, 2004

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Palo Alto Online

Publication Date: Friday, May 21, 2004

Renting to a phantom tenant? Renting to a phantom tenant? (May 21, 2004)

Even if you don't get caught, it's not in your best interest

by J. Robert Taylor

Q I rent some apartments and recently have had two different people want to sign rental agreements on apartments so they can enroll their children in Palo Alto schools. The prospective renters indicate that they will not even live in the apartment. Can I rent to these people? Do I have any liability if I do?

A The prospective renter is committing fraud on the school district. They are representing to the district that the apartment is their principal residence. Residency is a requirement of the district to enroll a child in school. Schools are so desirable that parents are trying to become phantom residents to gain enrollment for their children.

However, even if you didn't get caught or punished, this is against your interest as a landowner to rent to this type of tenant. Because of the way schools are funded it is a major expense for the school district if non-residents are enrolled in the local schools. Funding and facilities do not increase just because a new student enrolls. The district has limited resources to serve the students that actually reside in the district. The enrollment of non-residents would tax the system and the quality of the education that supports your high rental rates. The result would surely be a decline in the value of your property over time. In short, refuse to rent to someone who is not being honest.

Q I am buying a home in the area and I understand that some cities have transfer taxes that must be paid on the sale of a property. What cities have transfer taxes, how much are they, and who has to pay them?

A Several local cities have transfer taxes including: Palo Alto, Mountain View, San Mateo, San Jose and San Francisco. The rate of tax is based on so much per $1,000 of the amount paid for the property. Palo Alto's transfer tax is $3.30/$1,000 as is Mountain View, San Mateo and San Jose. San Francisco transfer tax escalates from $5/$1,000 up to $7.50/$1,000 for properties selling over $1 million. This tax is customarily split between the buyer and seller and is a one-time payment made at the close of escrow.

Each county also imposes a transfer tax of $1.10/$1,000 on all sale transactions, and the seller customarily pays this tax. Certain types of transactions are exempt from the county tax, but very few are exempt from the city transfer tax. The revenue from the tax goes to the general fund of the city that collects the tax. As will almost any cost in a real estate transaction, who pays these taxes may be negotiated between buyer and seller.

Most standard form real estate contracts allocate these costs according to custom. Costs could be significant. On a $1,500,000 sale in San Francisco the transfer tax is $11,250. Unfortunately, the portion of this tax paid by the buyer is not deductible against ordinary income, but merely increases the buyer's tax basis in the property. Those expenses that are immediately deductible by the buyer are limited to loan points, interest and real property taxes. Given budget shortfalls in many cities without transfer taxes, these cities may attempt to impose transfer taxes in the future on a healthy real estate market.

J. Robert Taylor, J. D., a real estate attorney and broker for more than 20 years, has served as an expert witness and mediator and is on the judicial arbitration panel for Santa Clara County Superior Court. He is 2004 chairman of the Palo Alto district for the Silicon Valley Board of Realtors. Send questions to Taylor c/o Palo Alto Weekly, P.O. Box 1610, Palo Alto, CA, or via e-mail at

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