Question: Frank Firsttimer purchased a home in March, 2009 and benefited from the $8000 tax credit. He just now received a letter from IRS stating that if he rents or sells the house within three (3) years of the purchase date, he has to return entire $8000. Is this true?
The credit must be repaid if, within three years of purchase, the home ceases to be the taxpayer’s main home. For example, a taxpayer who claims the credit based on a qualifying purchase on Sept. 1, 2009, must repay the full credit if he or she sells the home or converts it to business or rental use at any time before Sept. 1, 2012.
This is but one simple, straightforward scenario. What if the buyer bought in 2008 or 2009? There are a number of "if/then" different scenarios depending on when the person bought the property and what they're trying to do with it. Thankfully, the IRS has helped answer some of these questions with a couple of handy articles found here and here.
We always recommend you seek out the advice of a tax professional with any questions specific to your situation, but hopefully this post arms you with the basic information so you know what questions to ask.
As we discussed here, Maryland imposes upon a nonresident seller an income tax withholding at the time of settlement. For the past several years, the rate has been 7.5% of the net proceeds of the sale.
We have recently learned that Maryland has dropped that rate from 7.5% to 6.75% for individuals (including estates, revocable trusts, etc.). The business tax rate remains the same at 8.25%.
Brokers will want to update their forms, and agents will want to advise their nonresident sellers of this change.
On Wednesday, the District of Columbia enacted the "Saving D.C. Homes from Foreclosure Emergency Act of 2010." The key provision of which all of us dealing with DC real estate purchases must be aware is that for all foreclosure sales occurring November 17th or after, a "Mediation Certificate" must be recoded among the DC Land Records PRIOR TO the issuance and recordation of the Notice of Foreclosure.
Foreclosure attorneys, title agents and title insurance companies are all working diligently to see exactly what this means for DC foreclosures, but as this "Mediation Certificate" has yet to be created (to our knowledge), there seems to be a gap between what the law requires and what can practically be done to effectively foreclose on a DC property.
Again, as with any of these DC Foreclosure developments, the situation is very dynamic and fluid. As we receive more clarification and direction, we will pass that information along. To see all of our updates on Foreclosures, click here.
Prior to initiating a foreclosure involving a District of Columbia homeowner, a trustee or noteholder is obligated to confirm that the District’s land records demonstrate that the noteholder has the security interest that will be listed in the foreclosure sale notice. Each assignment of interest (or other document) by which the security interest was transferred to the noteholder, or to one of the noteholder’s predecessors in the chain of conveyances from the maker of the note, must be recorded with the Recorder of Deeds.
This means that before a foreclosure sale can occur, there must be a clear chain of ownership of the indebtedness such that the public records match the name of the entity who is doing the foreclosing. Because of MERS and the securitization of loans today, this clear chain doesn't always exist.
How does this affect how we issue title insurance in DC?
We have received two underwriter bulletins on this subject. In the first, we are asked to comply with the statement and ensure there are "recorded assignments of the Deed of Trust each time the owner of the note sells the indebtedness so that a clear chain of ownership of the indebtedness leads to the lender who is directing the trustee to initiate the foreclosure action."
In the other bulletin (from another underwriter), we are asked for the following for DC sales transactions:
Proof that the foreclosed Deed of Trust was not secured by owner-occupied residential property at the date of initiation of foreclosure proceedings, in the form of an affidavit from the foreclosing lender or its agent stating that the defaulting borrower(s) did not occupy the property as his/her/their personal residence at the date foreclosure proceedings were commenced.
This obviously adds some some additional complexity to our title reviewing process, and may in some cases render a title uninsurable. Many speculate there may be some emergency legislative or judicial action to more clearly reconcile this opinion and that of MERS with respect to the latter's ability to foreclose on properties.
On May 20, 2010, Governor O’Malley signed into law Chapter 689, HB 659 which repeals Estates and Trusts Sections 13–601 through 13–603 (Powers of Attorney) and adds Estates and Trusts Sections 17–101 through 17–204 under the new title “Maryland General and Limited Power of Attorney Act.” The Act takes effect on October 1, 2010.
Among the many changes are two distinct provisions which Maryland real estate practitioners should be aware of: (1) New execution requirements and (2) new statutory forms.
New Execution Requirements
In addition to the pre-existing requirements for properly executing a power of attorney (POA), a POA executed after September 30th must be attested and signed by two or more adult witnesses who sign in the presence of the principal and in the presence of each other (one of the witnesses can be the notary). Signature blocks for these new requirements are a part of the new statutory form.
New Statutory Forms
The Act creates, among others, two forms which real estate professionals should be aware of. The first is the Maryland Statutory Form Limited Power of Attorney. While the statutory doesn't have to be used, if it is it cannot be refused on the basis of the content of the form alone.
A Maryland real estate professional will also see a Certification as to the Validity of Power of Attorney and Agent’s Authority used in conjunction with a POA. This form must be executed before a notary and recorded along with the POA in every transaction. In the absence of fraud, such certification is “conclusive proof of the nonrevocation . . . of the power at that time.”
As a reminder, a POA should only be used when principal(s) absolutely cannot sign or be present at a closing. They have been tools for fraud and real estate related scams. As a title company, we will always inquire as to why one is being used, so if your buyer or seller is using one, please be prepared for questions!
On May 8, 2007, Governor O’Malley signed House Bill 580 - “Ground Rents – Registry of Properties Subject to Ground Leases” - which became Chapter 290 of the Laws of 2007. The law provided for the creation of an on-line registry of properties that are subject to ground rents and required that all ground rent owners must register every ground rent owned by the owner with the State Department of Assessments and Taxation (SDAT) and pay a fee by September 30, 2010 or else risk having said ground rent interest extinguished.
Now that September 30th is fast approaching, what's going to change?
According to at least one of our underwriters, Fidelity National Title Group, absolutely nothing. This is because there is a pending lawsuit [Charles Muskin vs. State Department of Assessments and Taxation (Case Number 24C10004437)] which if successful will deem the ground rent legislation as unconstitutional and will bar its enforcement. So long as this case is active, Fidelity tells us, we are to treat ground rents as we always have and will not render a ground rent as extinguished just because it fails to appear in the registry.
Note that this just one underwriter's position, but we fully expect the other major title insurance companies to follow suit in the coming days. We will continue to update you on what other title insurance companies are doing as well as the status of the case and how it affects this legislation. Stay tuned!
UPDATE: On September 24th, another one of our underwriters, First American, sent us a memo with substantially the same information as the earlier Fidelity notice. This is now the second underwriter who has told us "business as usual" with respect to ground rents.
As reported in today's Wall Street Journal, home-resale fees (also known as "reconveyance fees" or "private transfer fee covenants") are under attack by a group led by the National Association of REALTORs®and the American Land Title Association. Home-Resale Fees are set by a developer to trigger when any subsequent homeowner sells the property, with the typical 1% of the sales price going to the developer. 12 states, including Maryland, have outlawed this type of transaction fee, but if this group is successful there will be a federal ban on such a practice.
Thank you to our DC and Montgomery County, MD partner Paragon Title for this information:
The District of Columbia Office of Tax and Revenue has changed the procedure for filing Homestead Deduction Applications. The Homestead Deduction results in a $67,500 decrease in the taxable assessment and places a 10% cap on the annual amount that a tax assessment can increase for qualified owner occupied properties in the District of Columbia. As a result of this change, homeowners will be responsible for filing the application themselves and your title company or title attorney will no longer be able to file it for them a part of the closing. The procedure for filing the Application is not difficult, but the requirements must be met in order for a homeowner to receive the benefit of the Deduction.
In an effort to ensure that anyone who receives the Homestead Deduction actually qualifies, DC has mandated that the Applicant satisfy the following specific requirements:
The Applicant must have actually moved into the property.
A completed Application must be submitted with the required indicia of domicile: (a) DC Driver’s License with the subject property address on it. (b) DC Car Registration with the subject property address on it. (c) DC Voter Registration. (d) Proof of Paying Income Taxes in DC. i. Current Residents - DC Tax Return ii. New Residents - Pay Stub showing DC taxes withheld.
To ensure that the Application will not be rejected, the Applicant should make every effort to include all of the above indicia that apply. DC has suggested that if the Applicant does not attach a DC Driver’s License or a Car Registration because they do not own a car and/or drive, they should state “I do not drive” and/or “I do not own a car.”
If a DC Voter Registration is not attached and the Applicant is not registered to vote in another state, the application should specify “I do not vote.” The Applicant cannot have a voter registration in any other jurisdiction.
The Homestead Department prefers that the Application and supporting documentation be emailed to Homestead@dc.gov. Applicants cannot take a Homestead Deduction on more than one property. Purchasers who are currently receiving the Homestead Deduction on another DC property must include a “Cancellation of Homestead Deduction” form in that same email. A link to this form can be found on the left side of this Bulletin. Once the application has been submitted, the Homestead Department will acknowledge receipt by email.
HOMESTEAD APPLICATION AND CANCELLATION DOCUMENTS: This link directs you to the Real Property Forms page on the DC Office of Tax and Revenue’s site. Under the heading “Tax Relief” you will find all of the relevant Homestead Documents. http://otr.cfo.dc.gov/otr/cwp/view,a,1330,Q,593974.asp
Congress acted at the 11th hour today by signing and sending to the President a bill which would extend the closing deadline for the First Time Home Buyer Tax Credit from 6/30/10 to 9/30/10. It is expected that President Barack Obama will sign the bill, thus giving an estimated 180,000 home buyers the benefit of the credit they otherwise would not have have received due to delays in settlement.
It appears that there is much confusion in our industry and in the media regarding the homebuyer tax credit deadline.
As of today, the June 30, 2010 closing deadline for purchase contracts entered into on or before April 30, 2010 has not been extended.
On June 16, 2010, the Senate passed bill H.R. 4213 (American Jobs and Closing Tax Loopholes Act of 2010) which included a House Amendment to extend the June 30, 2010 closing deadline to September 30, 2010 (see this post). H.R. 4213, however, contains many provisions unrelated to the tax credit deadline and the bill that passed the House is different than the bill that passed the Senate. Thus, Senate and House members are in committee to work through their different versions of this bill. Once a version is agreed upon, the final bill will be presented to President Obama for signing. Only then will we know whether the closing deadline is extended.
We will continue to keep everyone posted on any developments
The Senate voted 60-37 today to extend the closing deadline of the home-buyer tax credit from June 30th to September 30th. The bill still needs passage by both chambers of Congress, but if successful will allow home buyers who signed a contract by April 30th to still get the full benefits of the home-buyer tax credit provided they settle by September 30th, 2010. This will be particularly helpful for those buyers who entered into short sale or REO (foreclosed) properties in the waning days of the 4/30 signing deadline, as many of those transactions will not be ready to settle by the end of this month.
While Anne Arundel County announced earlier that they will assess recordation taxes on sales price, Prince George's County has not yet decided on the matter.
The Finance Director, Michael Dougherty, communicated with PGCAR by phone late yesterday (Thursday 1/28/10). He is suggesting that REALTORS® and title professionals who have settlements pending over the next several days contact him directly to negotiate the tax. Mr. Dougherty offered his direct line, 301-952-4013. PGCAR recommends that REALTORS® and others print the attached Attorney General opinion and make contact with Mr. Dougherty as he suggests.
We will continue to keep you posted on this issue....
As we reported here on January 8th, several counties, including Anne Arundel County, had decided to use unpaid principal mortgage balance rather than sales price as a basis on which to assess recordation taxes. Naturally, this decision was largely condemned by the Maryland real estate and taxpayer community.
Today the Baltimore Sun reports that Anne Arundel has backed down from this practice, citing an opinion from the Maryland Attorney General that the "practice isn't supported by state law." The full article can be found here. The county will instead assess recordation tax on the sales price as it previously had.
Montgomery County had also attempted to implement a similar taxing scheme, but backed down shortly after announcing it.
This is great news not only for Maryland tax payers and real estate practitioners, but also for folks everywhere. The American Land Title Association was closely monitoring the situation here in Maryland, as a successful implementation of this by one or more counties could have encouraged others to do the same.
As we discussed here, the First Time Homebuyer Tax Credit was extended and expanded on November 6th. Of the many questions posed by passage of this bill, the one that we have been asked the most is, "Does a taxpayer need to sell his existing house to be eligible for the $6,500 'step-up' tax credit?"
It appears the IRS just recently added the following Q&A item to their FAQ document, and the answer is: NO.
"Q: I’m already a homeowner. If I buy a replacement home after Nov. 6, 2009, to use as my principal residence, do I have to sell my home to qualify for the homebuyer tax credit?
A: If you meet all of the requirements for the credit, the law does not require you to sell or otherwise dispose of your current principal residence to qualify for a credit of up to $6,500 when you buy a replacement home after Nov. 6, 2009, to use as your principal residence. The requirements are that you must buy, or enter into a binding contract to buy, the replacement principal residence on or before April 30, 2010, and close on the home by June 30, 2010. Additionally, you must have lived in the same principal residence for any five-consecutive-year period during the eight-year period that ended on the date the replacement home is purchased. For example, if you bought a home on Nov. 30, 2009, the eight-year period would run from Dec. 1, 2001, through Nov. 30, 2009."
You should still have your clients seek the advice of a trusted tax professional before making such a decision if the tax credit weighs heavily on her list of reasons to buy or not to buy. Have the buyer provide the CPA with the exact situation, and ask them to research before making the decision!
Thank you to James Carroll and Marney Kirk for the information you provided to help with this post.
Last Friday HUD announced that it would exercise "restraint" in enforcing the new RESPA provisions set to go into effect on January 1, 2010 that deal with the Good Faith Estimate (GFE) and the HUD-1 Settlement Statement. We passed this story along here.
What we have questioned is the effect of this decision: Does delay of enforcement mean a delay in implementation, or are lenders still going to go live with the new forms on January 1st?
We have received strong indication from industry resources such as First American and the American Land Title Association (ALTA) that this decision is not a delay in implementation, but merely a delay in enforcement. There are still some practical considerations in some jurisdictions which make full compliance with the new rules impractical or impossible, and HUD does not want to be imposing financial obligations against companies who cannot possibly follow the new regulations.
We will continue to monitor this closely so agents and brokers know what to expect as of the first of the year. Stay tuned...
Starting today, FHA will no longer seek a second appraisal for so-called "FHA Jumbos" in declining market areas. FHA Housing Commissioner Dave Stevens made the announcement on Saturday to a packed house at the 2009 REALTORS® Conference & Expo in San Diego. Details on the appearance by Commissioner Stevens and the new FHA change can be found here.
The U.S. Department of Housing and Urban Development (HUD) announced today that while the new regulatory changes to the HUD-1 Settlement Sheet and Good Faith Estimate (GFE) are still effective January 1, 2010, the board overseeing enforcement of these new rules will "exercise restraint in enforcing" them. The full article from HUD.gov is here.
The likely impact is that for the first 4 months of 2010 borrowers could see either the current or the revised GFE and HUD-1 form, depending on whether the lender has implemented the changes.
We have received several questions lately surrounding the extension and expansion of the First Time Homebuyer Tax Credit. As I research and answer, I'll also post here.
Q: The buyer is a single taxpayer making $130,000 a year, $10,000 of which is his employer's contribution to the buyer's 401(k). Assuming he qualifies in all other respects and has no other income than mentioned above, does he qualify for the tax credit?
A: Yes. The new income limit is $125,000 for a single taxpayer (increased from $75,000). The definition of "income" for the purposes of this tax credit is Modified Adjusted Gross Income. While the $10,000 in employer contributions is technically income, it is not included in the IRS definition of Modified Adjusted Gross Income and therefore the buyer qualifies with $120,000 in "income."
Tomorrow we'll discuss whether a buyer must sell their current house to be eligible for the $6,500 existing homeowner tax credit. Stay tuned!
Note: Please consult with a CPA before making any decisions. These posts are meant to provide the real estate community with a broad understanding of real estate topics and are not to be relied upon as legal or accounting advice.
We have seen a few folks question whether it is the contract date or the settlement date which determines whether an existing homeowner qualifies for the $6,500 tax credit. The National Association of REALTORs (NAR) is indicating that it is indeed the settlement date. Even if your buyer is already under contract, as long as the settlement takes place after President Obama signed the bill (and assuming he qualifies in all other respects), he is eligible for the credit.
Question: I am an existing homeowner. On October 25, 2009, I signed a contract to purchase a new home. I have lived in my current home for more than 5 consecutive years and am within the new income limits. I will go to settlement on November 20. If President Obama has signed the bill by the time I go to settlement, will I qualify for the new $6500 tax credit?
Answer: Yes. The existing homeowner credit goes into effect for purchases after the date of enactment (when the bill is signed). There is no reference to the date of contract for the new credit. The provision looks solely to the date of purchase, which is generally the date of settlement.
As always, your buyers should seek the advice of a CPA to determine eligibility for any tax credit, but this is helpful information.
Today President Obama signed the Unemployment Insurance Bill, which contains a provision to extend the current $8,000 First Time Homebuyer Tax Credit and expand the reach of the credit by allowing for a $6,500 credit to so-called "step-up" buyers. Details of the story can be found here.
As a real estate agent, how do I explain this to my client or determine whether her transaction qualifies?
