Confused About How to Hold Title to Your Property? Here Are Your Options

One of the most important decisions that needs to be made at closing is how you choose to hold title. It determines how you will be insured, but it can also have significant legal and tax consequences.

For example, there is an option available to married couples that provides protection from creditors in the event of the death of one of the spouses. There is also an option that affords a “right of survivorship” between unrelated owners. If not set up correctly, how you hold title can create unanticipated complications when you decide to sell or transfer the title to someone else.

Several years ago a married couple decided to take title to their house as “Joint Tenants” or joint owners. The husband had children from a previous marriage and intended to will his share of the property to his children. He was not aware that when one Joint Tenant dies, his or her interest automatically passes to the surviving owner and by law cannot be willed to anyone else. Fortunately, the couple discovered this stipulation before closing, and took title instead as “Tenants in Common.”

There are six common ways to hold title, and the first three are reserved exclusively for married couples.

Tenancy by the Entirety

This is a special type of joint tenancy with rights of survivorship that is recognized between married couples including same-sex marriages in Alaska, Arkansas, Delaware, Florida, Hawaii,Illinois, Indiana, Kentucky. Maryland, Massachusetts, Michigan, Mississippi, Missouri, New Jersey, New York, North Carolina,Oklahoma, Oregon,Pennsylvania, Rhode Island, Tennessee, Vermont, Virginia, Tennessee and Wyoming. In order to form a Tenancy by the Entirety, a couple must acquire the property at the same time and the title to the property must be granted by the same instrument. Additionally, both partners must share the same interest in the property and must hold equal rights to possession of the property.

Property held under Tenancy by the Entirety cannot be sold, mortgaged, or used as collateral by one spouse without the consent of the other spouse. It allows spouses to own property as a single legal entity, offering protection to a surviving spouse from creditors of the deceased spouse. Tenancy by the Entirety cannot be used in Community Property states.

Community Property

Community property is a legal distinction that determines ownership of a married couple’s assets and is available in Arizona, California, Idaho, Louisiana,Nevada, New Mexico, Texas, Washington and Wisconsin. Property held in this manner does not have to pass through probate when one spouse dies, and the title passes directly to the other spouse. It is similar to holding title in Joint Tenancy, but it is limited to married couples or registered domestic partners. Although Alaska, Florida, Kentucky, South Dakota and Tennessee are not a community property states, they have an opt-in community property law. Spouses can designate their property by community property standards by way of a property agreement to by establishing a community property trust.

Community Property With Right of Survivorship

In Community Property ownership all assets obtained during the marriage are owned 50/50 but any assets acquired by a spouse prior to the marriage still belongs to that spouse alone. If the asset-owing spouse dies, the asset (a house) would not be inherited by their surviving spouse unless specifically stated in a will. To avoid probate or other problems, coupes can instead take title as Community Property with the Right of Survivorship. This is a fairly new designation of ownership and it ensures that when one spouse dies, their half of a shared community property goes directly to the other spouse—and to no one else. Survivorship with Community Property is only available to married couples or registered domestic partners in these sates: Alaska, Arizona, California, Idaho, Nevada, and Wisconsin. To turn property into Right of Survivorship community property you simply put the words on the title deed. Spouses are free to change their minds and remove the survivorship provision later, but it must be done in writing in a new deed.

Sole and Separate property

Sole and separate property means that no one else has any interest in the property. If you are married and want to take title this way, you should record a quitclaim deed from your spouse to yourself so that no “community interest” could be claimed at a later date. This applies only in community property states.

Joint Tenancy

The distinguishing characteristic of Joint Tenancy is the right of survivorship. If one of the joint tenants dies, his or her interest automatically passes to the surviving party or parties instead of being tied up in lengthy probate proceedings. Joint tenants own an undivided equal interest in the property and have the same rights to the use it. For example, neither co-tenant can distinguish which portion of the property he or she owns. Once a joint tenancy has been created, no joint tenant can sell his or her interest without terminating the joint tenancy. If either sells his or her interest, the buyer comes in as a tenant in common rather than as a joint tenant.

Tenancy in Common

When two or more people buy property together, whether their shares are equal or unequal, they can hold the property as Tenants in Common.Tenancy in Common is so standard as a form of ownership for unrelated buyers that it is generally presumed to be the way they hold title if nothing else appears to the contrary. The shares are also presumed to be equal, unless they are listed otherwise on the deed, and each of the tenants has equal rights of possession. Each co-tenant owns an undivided interest, but unlike a Joint Tenancy, these interests need not be equal, may arise from different conveyances, and do so at different times.

At some point, you may decide that you want to change the way you hold title to, for example, place the property in trust for a child or to

gift property to adult children. It can be a relatively simple matter to change the form of ownership. Single people can use a Quitclaim Deed to transfer the property from themselves to themselves in the new category in which they wish to hold title. Married couples would follow the same procedure using an inter-spousal deed.

Alternate Ways to Hold Title

Other ways to hold title (often used for estate planning purposes) are revocable trusts or living trusts where of one of the spouses has part ownership of the home among two trusts, or variations of these types of ownership. Limited Liability Partnerships (LLC) can be an option in other circumstances.

Depending on your area’s regulations, you may need to use particular wording in your deed, so it is a good idea to get the advice of a professional or lawyer first. You will need to get the deed acknowledged before a notary public, and then have it recorded at the clerk’s land records office.

How to Use Seller Financing to Your Advantage

Seller financing can be a useful tool to not only the Buyer but also to the seller. With unpredictable loan rates and difficult qualifying criteria, seller financing can bridge the gap for a short-term (3-10 year) period of time.

Two significant advantages to the Seller who offers a convenient and flexible financing package to prospective Buyers is that it makes the property more marketable and defers the Seller’s tax liability on the profits. Not only does the Seller avoid the entire profit tax due in the year of the sale, but the seller earns interest on the portion of the note principal that represents the tax not yet due and payable.

Closing can be faster in Seller-financed properties due to the conventional rule that Borrowers must be given a Closing Disclosure form three days before closing. If the loan would need to be modified, the three-day waiting rule would start over and and cause further delay.

The mountain of legal disclaimers and paperwork involved in a conventional mortgage can slow the process down, and conventional lenders can — and often do— change their terms days before closing.

Buyers save on the typical lender costs such as loan origination fees, discount points, mortgage insurance premiums, processing fees, and other added expenses. When the Seller acts as the lender a lower downpayment is possible and is negotiable between the Buyer and Seller— where as most conventional mortgages require a 20% downpayment. Sellers can dictate the qualifying process for the potential Buyer and shorten the typical closing time significantly.

If a seller-financed sale seems appropriate for your circumstances, have a title company check for any outstanding liens or other title issues, and hire a lawyer to prepare the paperwork, including the note, deed of trust, or mortgage documents. Consult with your CPA or tax attorney for the best way to structure the loan to be tailor-made for the your individual financial situation and tax responsibilities.

State by State Sales Tax Rates

This map indicates individual state sales base-line tax rates.

Local sales taxes are collected in 38 states. In some cases, the local tax can rival or even exceed the state rates. Local sales tax rates are adjusted depending on how much revenue is collected and how the tax affects the state’s economy.They can also vary from county to county within a state.

As of mid-2021, the five states with the highest average combined state and local sales tax rates are Louisiana (9.55 percent), Tennessee (9.547 percent), Arkansas (9.48 percent), Washington (9.29 percent), and Alabama (9.22 percent).

State By State Income Tax Guide

As of 2021, seven states — Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming — levy no state income tax. Two others, New Hampshire and Tennessee, don’t tax earned wages. While Tennessee used to tax investment income and interest, the Hall income tax was fully repealed on Jan. 1, 2021. New Hampshire currently taxes investment income and interest, but it is set to eliminate those taxes soon. That will bring the number of states with no income tax to nine by 2024. Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah have a flat income tax.

Tennessee only taxes interest and dividend income.

Homeowners Take Note: You May Have More Tax Deductions Than You Know

The 2016 tax year officially opened Jan. 19 when the Internal Revenue Service started accepting 2015 tax returns.

Despite rumors that several valuable homeowner deductions might be eliminated or modified, taxpayers are in luck this year. In mid-December, Congress passed the Protecting Americans from Tax Hikes Act of 2015. Many exemptions that would have expired were extended for a year or more, and others were made permanent.

Spared were the exemption for private mortgage insurance to protect the mortgage holder; the tax credit for energy-efficient home improvements; and the exclusion for mortgage-debt forgiveness for owners of a foreclosed or short-sale home.

The elimination of those allowances would have been a significant financial setback to many homeowners. According to a recent National Association of Realtors survey — Profile of Home Buyers and Sellers (November 2015) — 80 percent of home buyers view home ownership as a good investment, and 43 percent believe that buying a house is a better investment than putting money in the stock market.

The association estimates that homeowners save an average of $3,000 a year in taxes from mortgage-interest and property-tax deductions.

To take advantage of the tax breaks allowed homeowners, Schedule A of the IRS Form 1040 must be completed. The IRS provides information in its Publication 530 ( www.irs.gov/publications/p530 ), which outlines what can — and cannot — be deducted.

Lisa Greene-Lewis, a certified public accountant and a tax expert for online tax preparer TurboTax, pointed out that its program asks homeowners specific questions related to a home purchase or homeownership to prevent any allowable deductions from falling through the cracks.

For example, Greene-Lewis said, the program will ask such questions as: Are you a homeowner? Did you pay points? Did you refinance the mortgage?

Brian Davis, a CPA with Ross and Moncure in Alexandria, Va., said that most of his homeowner clients are aware of the common deductions. But they often need to be reminded of others — such as points paid on a prior refinance.

“If a homeowner paid points on a refinance in the past and then obtains a new refinance loan, the balance of the points from the prior loan may still be deducted,” Davis said. He also said clients should keep track of any large capital improvements they make to the home because those expenses can be deducted — to help reduce any capital gains tax that might be due — when the property is sold.

If you purchased a home last year, some costs associated with the sale will be deductible; others may not be. Look at the closing statement (either the HUD-1 or the replacement Closing Disclosure form used after Oct. 3, 2015) to determine what is allowed.

The items on the closing statement will fall into three categories relevant to your tax return: tax-deductible in the current year; capitalized (added to the price paid for the property and, therefore, part of your base for capital-gains-tax purposes when you sell); neither (personal expense).

Some tax-deductible items include mortgage interest, points, loan-origination fees, prepayment penalty, property taxes and PMI. Capitalized items include pest-clearance costs, title-insurance premiums, and attorney, appraisal, recording, notary and escrow fees. Personal expense items include fire insurance premiums, money paid into an impound account (funds held in reserve by the lender to pay property-related costs, such as property taxes and insurance) and condo association fees.

Here are facts about some deductions that you may not be aware of:

Mortgage interest on a refinance, a home-equity loan or a home-equity line of credit may be deducted as an expense.
Private mortgage insurance may be deductible for a second property in addition to a primary residence (as long as the second home is not a rental unit).
Discount points — paid to lower the interest rate on a loan — may be deducted in full for the year in which they were paid.
Discount points on a refinance must be amortized over the life of the loan.
Home improvements made for medical reasons can be tax-deductible under certain circumstances.
Homeowners who work from home can generally deduct expenses for a qualified office — phone lines, heating and electric expenses and renovations — including a portion of mortgage interest, property taxes and insurance.
The deductibility of a mortgage varies with the length of the loan. Homeowners pay about 65 percent less mortgage interest with a 15-year mortgage than with a 30-year loan.
An energy-efficiency tax credit may apply to storm doors and energy-efficient windows, insulation, air-conditioning and heating systems. The credit is currently 10 percent of the amount paid up to $500.
Mortgage-debt relief related to a short sale or foreclosure has been extended to include cancellations completed during 2015 and 2016.

What Is the IRS Form 4506 Which I Might Be Asked to Sign at Closing?

What is the IRS Form 4506 which I might be asked to sign at closing?

Form 4506 is a form which gives a lender the right to receive a borrower’s tax returns in order to verify the borrower’s income. Most all lenders use this form. It is honored by the IRS for 60 days after it is signed and dated. A WORD OF CAUTION: If your lender insists that you sign the form, but leave it undated, this would give the lender the right to use the 4506 form and view copies of your tax returns, any time over the life of your loan. To limit the lender from access to your tax returns indefinitely over the term of your loan, be sure to insist that you be able to date the form at the time of signing.

Will I Have to File a State Income Tax Return?

There are currently seven states which do not require you to file a state income tax return.

States with no individual income tax
Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.

The two states in Blue, Tennessee and New Hampshire, require you to file only if you have dividend or interest income to report.

States which require a state tax return
States which do require you to file a state income tax return are:

Alabama
Arizona
Arkansas
California
Colorado,
Connecticut
Delaware
District of Columbia
Georgia

Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine

Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska

New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon

Pennsylvania
Rhode Island
South Carolina
Utah
Vermont
Virginia
West Virginia
Wisconsin

Flat Income Tax vs. Range Income Tax
Seven states — Colorado, Illinois, Indiana, Massachusetts, Michigan, Pennsylvania and Utah — have a flat income tax, while the rest collect according to income ranges. The ranges that apply to 2012 tax rates vary not only by percentage but also by the amount of brackets within the range, with the fewest being one, the flat tax, and the most being 12. Whether you plan to file as a single or married person also affects the percentage required.

New York, for example, has the following brackets for 2102 for single persons, with the percents simply doubling for married persons filing jointly:

4 percent on first $8,000
4.5 percent between $8,001 and $11,000
5.25 percent between $11,001 and $13,000
5.9 percent between $13,001 and $20,000
6.85 percent between $20,001 and $200,000
7.85 percent between $200,001 and $500,000
8.97 percent on more than $500,000

Alabama has a significantly lower income tax for its residents. Single persons, heads of families and married persons filing separate returns pay:

2 percent on first $500
4 percent between $501 and $3,000
5 percent on more than $3,000

Married persons filing jointly pay:

2 percent on first $1,000
4 percent between $1,001 and $6,000
5 percent on more than $6,000

California spans a much wider range of taxpayers. Single persons and married persons filing separately pay:

1.25 percent on first $7,060
2.25 percent between $7,061 and $16,739
4.25 percent between $16,740 and $26,419
6.25 percent between $26,420 and $36,675
8.25 percent between $36,676 and $46,349
9.55 percent on more than $46,350

In California, married couples filing jointly simply double the percentage. The above percentages apply to taxable income, meaning that deductions can move you to a lower tax bracket.

To learn what the income tax rates and brackets are for your state, contact your state’s department of revenue.

Will My Escrow Agent Have to Report My Sale to the IRS?

The Tax Reform Act of 1986 required anyone responsible for closing a real estate transaction, which may include the escrow agent, title company, or attorney, to report a real estate sale or exchange to the IRS on Form 1099-S. In addition, they were required to furnish a statement to the seller of the gross proceeds of the sale. In 1998, with the passage of the Tax Payer Relief Act of 1997, an exception to this reporting requirement was allowed.

If the sale price of your residence is $250,000 or less ($500,000 or less for married sellers) and you have lived in the property, as your principal residence, for the last two out of the last five years, your closing agent will not be required to file Form 1099-S with the IRS. The gross proceeds of the sale need not be reported to the IRS if these conditions are met.

Be sure that your closing agent has your written confirmation that your sale is exempt from the IRS reporting rule. Most closing agents have a form, called a “Certification for No Information Reporting on the Sale or Exchange of a Principal Residence” which you will you be asked to sign at closing. The form will ask for your seller information, social security number, address, and certification that you have met the exemption requirements.

What is the First Time Homebuyer Credit?

The First Time Homebuyer Credit is a credit available to taxpayers who purchase a primary residence during the period April 8, 2008 and December l, 2009. It is a result of the Housing and Economic Recovery Act of 2008 and the American Recovery Reinvestment Act of 2009. One important qualification is that you (and your spouse, if applicable,) cannot have owned a home for the three years prior to your purchase.

In addition to the requirement that the home be your primary residence, there are income limitations as well. No credit will be given if your adjusted gross income, for a married couple filing a joint return is $150,000 to $170,000. For other taxpayers, the qualifying range in order to qualify for the credit is between $75,000 to $95,000. The home cannot be used as a rental or vacation property.

For homes purchased in 2008, you will be required to repay the credit over a fifteen year period, in 15 equal, annual installments beginning with your 2010 income tax year. This requirement does not apply to home purchases made in 2009, in which no repayment is necessary.

The amount you will receive if you qualify for the credit is ten percent of the purchase price of the home, with a maximum allowable limit of $8,000.00 ($7,500.00 for homes purchased in 2008). You apply for the credit by filling out an IRS Form 5405 and submitting it with either your 2008 or 2009 tax return, whichever may apply in your case. The credit will be applied to your federal tax bill, reducing the amount owed, or if you do not owe any tax, the credit will be refunded directly to you.

Many Buyers have asked if the credit applies to seller financed transactions. The answer is you may claim the credit whether you obtain a traditional mortgage or if you utilize seller financing.

For up-to-the minute details of this credit plan, you can refer to the Internal Revenue Service website at www.irs.gov.

First Time Home Buyer Credit Summary

Applies to a home purchase that closed after April 8, 2008 and before Dec. 1, 2009
Applies only to homes used as a taxpayer’s principal residence
Reduces a taxpayer’s tax bill or increases a refund, dollar for dollar
Is fully refundable, even if you owe no tax
The credit is claimed on IRS Form 5405
For homes purchased in 2009 the credit does not have to be paid back, unless the home is not the taxpayer’s main residence within a three- year period following the purchase
No vacation homes or rental properties qualify for the credit
There are income limits which apply to qualify for the credit.
The credit can only be claimed once the purchase has been completed. (close of escrow).

How Am I Taxed in an Installment Sale?

Installment sales are used to help spread out capital gains on a property for a period of more than one year. This is done by taking several, smaller payments for the sale of property instead of one large sum of money. A seller may also carry back a note, allowing the tax payments to be deferred. When a seller takes the option of a wrap around loan, or an all-inclusive trust deed, monthly payments are made from the buyer and the seller is only taxed on the gain earned in one year’s time, which will be spread out over the term of the trust deed.

What is a Trust and Should I Create One?

A trust is an arrangement which dictates how your assets are to be managed and distributed. Trusts are typically established to save taxes, avoid probate, control trust assets, and protect Beneficiaries. Trusts can be written so that they can be either permanent (irrevocable) or changeable (revocable). There are three parties to a trust: the Grantor, the person who creates the trust by signing a trust agreement and transferring assets to the trust to be managed by the Trustee, the person or trust company, who holds title to the property for the benefit of the Beneficiaries, or the individuals for whose benefit the trust is created.

If the purpose of creating a Trust is to avoid probate and provide for the possible loss of capacity, then the Trust is typically written as revocable or changeable. In a revocable Trust, the Grantor retains the right to change the terms of the Trust or terminate it at any time until death. If the purpose of the Trust is to obtain either present or future tax benefits, then the Trust is typically irrevocable. The Grantor gives up all rights to the property placed in the Trust and would generally be unable to modify or revoke the terms of the Trust.

A trust can be established when one is living (Living Trust) or it can be automatically created upon the time of death (Testamentary Trust). The Living Trust or “inter-vivos” trust is established during a person’s lifetime for the benefit of that person or of other beneficiaries. A testamentary Trust is established under a Will and becomes effective upon death, in which case the will and Testamentary Trust would be subject to probate.

To determine if you should create a trust, consult with your tax advisor or attorney, as each person’s circumstances differ. A qualified advisor can draft your trust agreement tailored to fit your specific needs.

In many cases, trusts help save taxes, help retain control over trust assets, and protect beneficiaries.

This column may not be resold, reprinted, resyndicated, or redistributed without the written permission of Escrow Publishing Company.

What is the Tax Exclusion Rule for the Sale of a Residence?

The Taxpayer Relief Act of 1997 has replaced the old Rollover Residence Replacement Rule, IRS Code Section 1034, which allowed you to avoid paying tax on your profit from the sale of a principal residence so long as you bought a replacement residence within 24 months before or after the sale. It also replaces the old IRS Code Section 121 which allowed for a one-time exclusion to sellers who were over 55. The act applies to all sales on or after May 7, 1997, and allows a $250,000 ($500,000 for married couples) exclusion from the tax on the sale of your principal residence. You no longer need to buy another house of equal or greater value to claim the exclusion.

There are a few guidelines you need to follow to take advantage of this ruling. You may use it repeatedly but not more frequently than once every two years. The property must be your principal residence, not a second residence or a rental property. The residence may be in or out of the United States. It may be a detached house, a mobile home, a co-op apartment, or a condominium. You cannot have more than one principal residence at the same time.

There is a special provision in this 1997 Tax Act which allows both spouses to claim up to $250,000 of tax-free profits, even if one spouse is not living in the residence. For example, if an ex-spouse lives in the family home for at least two of the five years before the sale, then the nonresident spouse can also qualify for up to $250,000 of home sale tax exempt profit. However, the law requires that both spouses file a joint tax return in the year of the home’s sale, if not, then only a $250,000 tax exemption would be allowed to the spouse who hold title. There is also a special provision for a surviving spouse. The surviving spouse is allowed to claim up to $500,000 of principal residence sale tax exempt profit if the home is sold in the year of the other spouses’ death. In the event where two or more unmarried co-owners each meet the ownership and occupancy requirements, each co-owner may also claim up to $250,000 of tax exempt profit when the home is sold.

This exclusion virtually eliminates most record-keeping requirements when you know for certain that you will not experience a gain of more than $250,000 ($500,000 for married couples) on the sale of your residence. Your escrow or title company is no longer required to file Form 1099-S, which reported these qualifying home sales to the IRS. The new act did not change the rules concerning a loss on the sale of your residence. If there is a loss, it is still not tax deductible.

For Tax Purposes, What Is The Best Time To Buy My House?

Knowing when to close your real estate purchase can work to your advantage at tax time. You may want to consider postponing your December closing until January of next year, if it will benefit you on your tax return. You would make this determination in several ways.

First, you need to review your tax liabilities for the current tax year with your tax accountant or tax preparer and see if taking additional deductions in the current or future year would be most beneficial to you. Next, you will need to understand which items in your closing will be tax-deductible and which items will added to the value of the property. Keep in mind that if you close on December 31 rather than on January 2 (or the first business day after the New Year), you will be permitted to take the allowable deductions for your home purchase in the year purchased, even if your closing occurs on the last day of the year. If you want to increase your deductions for the coming year, then you may want to choose to close in January. The normal allowable home purchase deductions will be the points, interest, and property taxes which you pay.

If you will be obtaining a mortgage on the property and will be paying points, this expense will be an allowable tax deduction. A “point” is the fee which represents 1% of your loan amount and may be charged by your lender or mortgage broker. The number of points you pay may vary from lender to lender. Points are referred to as a “nonrecurring closing cost,” and are fully deductible in the year paid. You should be aware that points on a refinance loan are not deductible in the year paid, but rather must be amortized and deducted over the life of the loan. There are certain other exceptions, such as the loan must be secured by your main home, but generally, the points will be allowed as a deduction in the year paid.

Prepaid and prorated interest is also deductible in the year paid and refers to the interest you are charged from the date of your closing to the beginning of the period covered by your first mortgage payment. As a reminder, keep in mind that mortgage interest and principal payments are paid in arrears. For example, if your closing takes place on December 10th, your first monthly payment would begin to accrue on January 1st and would be payable the beginning of February. You probably would be required to prepay the interest form December 10th through the end of December. If your closing occurs later in the month, you would pay less at the closing than if you had closed the first of the month. The amount of prorated interest you will be required to pay may be something for you to consider when choosing a closing date. Your lender will send you a 1099 form at the end of the year which will list the interest paid for the year. Be certain that it includes the prorated interest which you paid at closing.

Any prorated property taxes will also be an allowable expense item. The property taxes on the new property which you are purchasing will be prorated at closing and your portion will be allowed to be deducted as an expense for income tax purposes. Your escrow officer will calculate the tax prorations by dividing the taxes between you and the seller, based on the due date for the property taxes in your state. If the seller has paid the property taxes beyond the date of closing, the seller will be credited for this expense. If the taxes have not yet been paid, the amount owed will be charged to you and added to your closing costs. Your lender may require that the taxes be paid in full at closing, or they may be certain that they collect enough to cover the taxes until the next pay period. Any delinquent taxes which were due and which you may have agreed to pay, would not be a deductible expense. You would need to treat any delinquent taxes which you pay as part of the cost of your home. Keep in mind that some special government fees, such as water or sewer assessments, may not be deductible. Check with your accountant or refer to the IRS Publication #530 for which law applies to your circumstances.

You will want to assess your tax liability for the current and future year, to determine if it is in your best interest to close in 2000 or 2001. Keep in mind that once you purchase your property, you may want to choose to itemize your deductions on your tax return, if you have been taking the standard deduction previously. If your itemized deductions, which includes your mortgage interest and property taxes, do not exceed the standard deductions, you may be better off taking the standard deduction. Each individual has unique tax circumstances and your tax accountant or preparer will know what is best for you.

If you do decide to close on the last week of the month, be aware that this week is typically the busiest time for title and escrow companies. Be sure to schedule your closing well in advance of your closing day and notify your attorney, lender, seller, escrow officer and any other participants in the closing of the closing date which you choose. If you would like to investigate further which items will be tax deductible and which items will be added to the cost of your home, you may refer to IRS Publication #530, “Tax information for First Time Home Buyers.”

This column may not be resold, reprinted, resyndicated or redistributed without the written permission from Escrow Publishing Company.

Tax Prorations At Closing Time

Among the various items which will be prorated, or shared between the buyer and seller at the closing will be real estate property taxes. Although prorations are normally pretty straightforward and easy to understand, property taxes can be a problem if provisions are not made for an increase in tax assessment which may occur after the close of escrow.

Often the closing agent must use the taxes from the previous year to compute the prorations for the sale. Let’s say that your escrow closes in September and that the new taxes will not be available until November. If the taxes go up, are you responsible for new taxes for the whole year since you only lived in the property for 3 months? One answer to this problem is to sign a Proration Agreement, whereby the buyer and seller agree to make up the difference among themselves.

Many times it is common to ask the seller to pay a little extra in real estate taxes above the daily proration fee, because in many areas property taxes rise each year and the exact amount of the next bill may not be known. Oftentimes, the seller is asked to put up 110% of the daily fee to cover any increases.

Once escrow is closed, it would be difficult to go back to the seller and ask him to pay you for any additional property taxes. Likewise, you would not want the seller to come back to you and ask for a refund if the property taxes were to go down.

To prevent any misunderstandings, ask you escrow officer, attorney, or real estate agent about the property tax prorations, and find out when the property tax assessment is scheduled to be made in your state. Tax assessment dates vary from state to state. In California, for example, taxes become an outstanding debt against property on the first day of January, even though they are not payable until considerably later. The full fiscal year for property taxes in California runs from July lst to June 30th, and it is divided into two halves so that payments may be made in two installments. In Illinois, as another example, property tax payment dates vary. Larger counties typically schedule them for March lst and September lst, and smaller counties schedule them for June lst and September lst. You may consult the appendix of The Complete Guide to Your Real Estate Closing for a listing of property tax dates state by state.

Sandy Gadow

Making Real Estate and Closing Easy

Category Archives: Taxes