Real Estate Roundup with Sharon Alva: Tax credits and the real world
What a crazy few weeks. Buyers were trying to get in under the wire for the April 30th cutoff for the federal homebuyers tax credit. I had two clients making a mad dash for the finish line. Both signed April 29th and one managed to open escrow on the 30th. Whew.
The second transaction was with a bank owned property so while we did Fed Ex the deposit in time to the seller’s agent (as required by their special addendum), escrow was not open. What’s more, the verbal agreement came much sooner. It then took days for the bank to issue their addendum altering the offer. According to this addendum the “effective date” for the contract was the day the buyer agreed to their addendum, but the bank did not sign the contract and addendum until April 29. The buyer was thus in a binding contract retroactive to an earlier date.
All this brings up the question: What will the IRS be looking for to decide which transactions qualify for the tax credit, and which do not?
Traditionally a “binding contract” has three parts: Competent parties, consideration (something of value to exchange), and mutual assent. But so much has been left undefined by the IRS. For example, is the consideration there contractually, or does money need to be placed in deposit for the contract to be binding? Considering that different states do real estate differently, how will the federal government address contract start dates? Is it an open escrow like we have here in California? A purchase and sale the way East Coast states proceed? If significant changes happen during negotiations after April 30, what will be THE date the closed contract have been?
And then there are short sales. The signing by the seller will unlikely constitute a binding contract since the lender’s approval sets most other timelines in motion. I suspect that in cases of short sale the lender’s approval of the transaction will determine the start date of the contract.
So in the time-honored tradition of disclosure, I told my clients that I am not a tax advisor and that they must turn to a professional in that area to get the final word. And then I pushed, cajoled, and did all in my power to get all the interested parties to review and sign everything before April 30. Mission accomplished. And in the case of the bank owned property I saved the paper trail the IRS might require, to make sure my client could claim the tax credit. The buyer in this case did everything possible, in good faith, to meet the deadline, so why should they suffer when the bank does not fulfill its obligation?
Next: The California first time homebuyer tax credit. Hold on, folks.