Tax Deadline Extended… sort of

Congress Extends the Deadline to CLOSE

Last year, Congress passed a tax credit for first time homebuyers and many “long-time” homebuyers. This credit provided for two deadlines:

• Receive a binding offer to purchase on or before April 30, 2010
  
• Close the sale on or before June 30, 2010.
  

Lenders, title companies, and real estate professionals worked feverishly to close transactions before that June 30^th deadline. All the while congress was working (less feverishly, we are sure) to pass an extension of the bill.

Hours before it was set to expire, the Senate finally approved an extension to the June 30 closing deadline for the homebuyer tax credit, The move will give buyers who signed a purchase agreement by April 30 more time to close and still receive the tax credit of up to $8,000. Once signed by the President, the new deadline will be Sept. 30, 2010.

This extension will benefit those home-buyers who’s deals stalled or financing ran into trouble.  Many homebuyers could not close on short-sales or other distressed properties because of delays in lender approval.  The extension will be a welcome relief to those buyers.

Buyers, Realtors, and other professionals should be aware that this extension only affects home buyers who are in a binding contract that was signed before May 2010. It will not benefit those potential homebuyers who are still shopping for a home.
Interest Rates at Historic Lows

Nevertheless, today’s unprecedented interest rates may amount to a savings almost equal to the tax credit. Indeed, in January, a home-buyer might have locked in on a 30 Year Mortgage at 5.4%, a wonderfully low rate by historical standards. Today, that same 30 Year Mortgage might be at 4.6%. On a $200,000 mortgage, this amounts to a monthly savings of about $97.75 or $4,600 in just four years. While the tax credit might not be available for those still shopping for a home, the savings are still there.

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After The Deadline — Tax Credit Expires

The deadline for accepting a “binding contract” and qualifying for the home buyer tax credits expired on Friday April 30th.  For those who signed an offer on or before April 30th, they can still get the credit if they close by June 30th.

But the big question on the minds of Realtors and those in the real estate industry is:  Will buyers stop buying? 

 Will buyers jump back on the fence?  Will the market slow down?  Many expected a sharp decline in activity after the credit expired.  Others feel that the influence of tax credits and incentives is overstated. 

 We are curious to see what you are experiencing?  Post a comment and let us know.

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The Tax Credit and The “Binding Contract” Question

The Home Buyer Tax Credit has two deadlines:  1.  Enter a Binding Contract on or before April 30, 2010; and 2. Close on or before June 30, 2010. 

As the 1st deadline for the Home Buyer Tax Credit fast approaches, one question keeps rearing its ugly head: What is a “Binding Contract” according to the IRS? 

Unfortunately, at this point the answer is a resounding: Nobody Knows!  The IRS has not issued any guidance or definitions.  So what is a home buyer to do?

First, Write Clean Offers!  It is not uncommon for For-Sale-By-Owners (FSBOs) or inexperienced agents to inadvertantly leave certain contract terms blank.  This can lead to an ambiguous or unenforceable agreement.  In addition, contracts that allow one party to unilaterally cancel for any reason or are not enforceable as to one party may not be binding as to any party.  Thus, a contract that fails to state a critical term or allows a buyer to cancel the contract for any reason may not constitute a “meeting of the minds,” and my not be a “binding contract.”  Will the IRS scrutinize contracts to this level?  Who knows.  But it does add one more reason for Realtors, attorneys, and parties to be diligent in drafting offers to purchase.

Second, hire a trusted accountant or tax advisor.  The cost of great advice will be worth it if it means getting a large tax credit or avoiding an IRS headache later.

Third, don’t rely on the internet or sites like this for specific advice.  While we can offer thoughts and insights, only an accountant or attorney can offer advice specific to you or your clients.  Note that this posting does not contain any primary links to statutes or the IRS — this is an indication that it is not a source you want to rely upon to make a tax decision.  And that is our point — for you to NOT make any decisions based on this post (other than the decision to hire a professional!).

It would seem obvious that a well drafted contract with no contingencies that is signed by all parties on or before April 30th will meet the first deadline.  But few contracts are free of contingencies and some contingencies are more significant than others.  Consult your accountant or attorney if you have any questions about the tax credit and whether it applies to you or your client.

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Count-Down To Tax Credit Deadline

The deadline for the First Time Home Buyer Tax Credit and the Long Time Home Buyer Tax credit is FAST approaching.  The deadlines are:

1.  The parties must enter into a “binding contract” on or before April 30, 2010; and

2.  The transaction must close on or before June 30, 2010.

This means you have just days or hours until Friday, April 30 2010 to enter a “binding contract.”  Lets get those offers signed!

NOTE:  The IRS has not defined “binding contract” and many parties have questioned the effect of contingencies.  For instance, short sales require bank approval.  When that approval is a contingency that has not been met prior to April 30th, is there a binding contract?  One would have a strong argument that the offer is binding (the lender is not a party and their approval is only a contingency), but it is the IRS and a court’s interpretation that will matter.  Consult an accountant and or an attorney if you or your clients have this issue.  See Our Blog Post on Short Sales and The Tax Credit.

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Misunderstanding The Home Buyer Tax Credit Deadlines

 

 The Tax Deadline Approaches . . . or does it?

Buyers who wish to qualify for the first time home buyer tax credit must meet two deadlines:

1. They must “enter into a binding contract to buy, a principal residence on or before April 30, 2010” and
2. Close on the home by June 30, 2010.

See The IRS Website for more information.

So why are people flocking to close on April 30th?   We are seeing record volume for the last few days of the month. Indeed, Homestead Title’s sales volume for the last 4 days of April is up over 250% compared to the previous 5 year average.

Most title companies in Madison are already booked and the orders keep rolling in. (Homestead is still available for those who truly need to close – link here to place a title order). 

But this is a phantom deadline — the deadline for closing is not until June 30th.  Perhaps we are seeing a coincidental market upswing?  Perhaps buyers are erring on the side of caution?  Or perhaps buyers were simply confused when they wrote their offers and think they really need to close by the end of April?

Any questions about whether you or your buyer qualifies for the tax credit should be directed to an accountant. We have provided information from the IRS website, but it is important to consult with an expert about your specific facts and circumstances.

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First-Time Homebuyer Tax Credit

The First-Time Homebuyer Tax Credit is the subject of numerous questions and confusion. It is always best to consult an accountant or tax adviser about any tax related questions. This post is intended to offer some background and resources from the IRS. Indeed, everything in this post comes directly from the IRS website. You should consult an accountant or tax advisor about this credit and your specific circumstances.

The Original Tax Credit

The Housing and Economic Recovery Act of 2008 established a tax credit for first-time homebuyers that could be worth up to $7,500. For homes purchased in 2008, the credit was similar to a no-interest loan that must be repaid in 15 equal, annual installments beginning with the 2010 income tax year. The old deadline for receiving the credit was the end of November, 2009. The new law extended the deadlines for buyers that “enter into a binding contract to buy, a principal residence on or before April 30, 2010 and close on the home by June 30, 2010.”  For more information and common questions and answers, click here.

Homebuyer Credit Expanded & Extended

The Worker, Homeownership and Business Assistance Act of 2009 extended and expanded the first-time homebuyer credit. The new law made the following changes (among others):

• Extended the deadlines for buyers that “enter into a binding contract to buy a principal residence on or before April 30, 2010 and close on the home by June 30, 2010.
• Increased the credit to $8,000
• Expanded the credit to “long time” homeowners who meet certain requirements
• Raised the income limitations for homeowners claiming the credit.
  

   

  New Deadlines
  

  The new law has a two-tiered deadline: (1) The offer to purchase contract must be signed before the end of April and (2) the closing must occur before the end of June.
  

  Deadlines:        Enter into binding purchase contract on or before April 30, 2010
  

                            Close on the sale on or before June 30, 2010
  

  Taxpayers may have the option of claiming the credit on either their 2009 or 2010 returns. The credit may not be claimed before the closing date.  Any question regarding when the tax credit can be claimed should be directed to an accountant or tax advisor. 
  

  Increased Credit Amount
  

  The new law increases the credit to $8,000. If the home is purchased in 2009 or later, the credit does not need to be paid back unless the home ceases to be the main residence within a 3-year period after the purchase. In addition, “long-time residents” are now eligible for a $6,500 credit.
  

  Expansion To “Long-time Residents”
  

  The tax-credit applies to first-time homebuyers and “long-time” homebuyers. Neither category requires the home to be your very first home. In fact, “first-time homebuyer” means a buyer “who has not owned a primary residence during the three years up to the date of purchase.” A “long-time resident” is a buyer who has owned and used the same house as a principal or primary residence for at least five consecutive years of the 8-year period ending on the date of purchase of the new home as a primary residence.
   

Common Questions and Answers:

Q: Taxpayer A is a single first-time home buyer. Taxpayer B (parent) cosigns for A and does not qualify. Both names are on the mortgage. Can Taxpayer A claim the credit and, if so, how much? 

A. Yes. Taxpayer B is not a first-time homebuyer and cannot claim any portion of the credit, but A may claim the entire credit ($7,500 for purchase in 2008; $8,000 for purchase in 2009), if the home was purchased as Taxpayer A’s primary residence. (Source: IRS.gov webpage)

 Q: Taxpayer signs an offer to purchase before the April 30, 2010 deadline, but the purchase is a short sale that is contingent upon lender approval. Can the taxpayer qualify for the credit if the closing occurs before the June 30, 2010 deadline?

A: Probably. The fact that the offer is contingent upon lender approval should not disqualify the taxpayer from receiving the credit. The short sale lender is not required to have a binding agreement. Rather, the lender’s approval is just another contingency, just like the inspection contingency, the financing contingency or a testing contingency. 

Q: Can a married couple qualify for the first-time homebuyer tax credit if only one is meets the requirements?

A: No. Married couples cannot qualify unless both spouses meet the 3-year requirement. (Source: Turbo Tax Web Site; IRS.Gov site)

 Q: This tax law has already been extended once. Will it be extended again?

A: Your guess is as good as ours.
 

As with all laws and regulations, there are many exceptions, rules, loop-holes, and caveats. Consult an accountant or tax adviser and do not rely upon any website for advice – not even this one. A good place to start is the IRS Website.

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Short Sale Bank “Agreement” To The Offer To Purchase And The First Time Homebuyer Tax Credit

Two Common Questions:
1. Can a short-sale seller accept multiple offers until the lender approves the sale?
2. Can a first time homebuyer claim the Tax Credit if the short sale lender has not accepted the offer before April 30, 2010.

A common misconception with Short Sales is that the seller’s lender must agree to the Offer to Purchase. Buyers, Sellers, and Agents treat the banks “approval” as if it is a precondition to a valid offer. Thus, sellers often accept multiple offers, believing there is no accepted offer until the bank agrees to the offer. Buyers may believe that they won’t receive their First Time Home Buyer Tax Credit if the bank doesn’t approve the offer prior to the April 30 deadline. (Click here For more information about the First Time Homebuyer Tax Credit).

The Bank Is Not A Party
A short sale lender is not a party to the sale transaction. Nevertheless, you will need their approval to close. The approval, however, is simply their approval to accept less money than they are owed. They do not get to sign the offer nor are they parties to the offer. Lender approval may or may not be a contingency in the offer.  If it is not a contingency, it is hard to make an argument that there is not a “Binding Contrac.”  Even if it is a contingency, there is a strong argument that there is a “binding contract” – it is just subject to a contingency.  (NOTE: Consult an Attorney or Accountant for your own circumstances).

Thus, a seller who accepts two offers to purchase (without a provision that one offer is a “Secondary Offer”) has likely breached one or both of his contracts. And, on a positive note, a buyer who receives an accepted offer to purchase from a seller prior to April 30, 2010, may qualify for the Tax Credit even without the short-sale lender’s approval.  An eligible taxpayer must buy, or enter into a “binding contract” to buy, a principal residence on or before April 30, 2010.  The IRS has not explicitly defined the term “binding contract.”   Nevertheless, when a buyer and seller sign the offer, they have created a contract, with or without short sale approval — short sale approval is just one of many contingencies, including inspection, testing, title, and financing contingencies.   Whether this contract is ‘binding’ as defined by the IRS is unknown.  There is a good argument that the buyer would not be disqualified from the tax credit solely because the bank approval contingency is met after April 30th.  Nevertheless, any buyer encountering this issue should consult with an attorney, accountant, and/or tax advisor. We cannot say whether the IRS will interpret a contract to be binding before bank approval.

Feel free to contact Homestead Title if you have any Short Sale questions.

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