Your fair share
A big IRS credit isn’t the only way to save on taxes in a home sale
By Joanna Beresford 04/01/2010
Everybody wants that $8,000 first-time homebuyer’s credit, which means you’ve got to find your dream home, or some rough version of it, by April 30. Technically, that is. However, in real estate, as in real life, promises are usually more complex than they appear on the surface.
First of all, you don’t have to be sleeping in that house you’ve bought by the end of April. What you do need is a binding contract for the purchase of said home by then. Then you have to close escrow and move in by June 30. That means you can relax a little bit, but not much.
Local real estate expert John Hickey says that, depending on the ZIP code, anywhere between 30 to 80 percent of properties on the market right now are being offered in the form of short sales. And what’s short about short has nothing to do with chronology.
A short sale, as most people know by now, means that the homeowner wants to sell their property for something less than (short of) its original value. In addition to (or more crucial than) the homeowner’s willingness to sell short is the lender’s (the actual owner’s) involvement in such a deal.
Negotiating this transaction is a little Byzantine: prospective buyer makes a bid, current resident/owner accepts or modifies it to mutual satisfaction; buyer and seller draw up a contract (usually with the help of real estate agent and/or lawyers), then submit this provisional contract to the bank. At this point, a whole bunch of vaguely indistinguishable people in suits and skirts evaluate the contract, the market, the current state of their existing assets and liabilities — and, voila, a formal contract is either established or not.
This process can take months. Your contract with a current home resident is not considered a binding one in the case of short sales and, therefore, could put your big, fat tax credit at risk. I’ll get back to that. Meanwhile, there are other ways for homeowners to save tax dollars.
Other new tax laws loom in the financial middle distance. Have you made environmentally friendly or energy-efficient improvements to your home this year? Tax-deductible renovations fall into two categories. I don’t know what the accountants call them exactly, but to me the grouping is like this: structural and accoutremental. For example, if you improve the quality of insulation, add solar heating devices, or “smarter” windows and doors, you can include some of that expense in your tax write-offs.
If you buy Energy Star appliances, like federally approved washers and dryers, refrigerators or hair dryers (just kidding — I don’t think Energy Star includes hair dryers yet), you can also include those expenses in your tax documentation. Here’s the gist of it, in the sultry, irresistible language of the IRS Web site:
“Residential Energy Property Credit (Section 1121): The new law increases the energy tax credit for homeowners who make energy-efficient improvements to their existing homes. The new law increases the credit rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 for improvements placed in service in 2009 and 2010.”
Hickey suggests that costs for these kinds of home improvements might be included in a home loan for a new property. In an existing property, you might apply for a Federal Housing Administration home improvement program that would facilitate such money and energy-saving changes.
Now, back to that $8,000 credit. There are a couple of things to keep in mind. You’ve got to live in that newly purchased first home as your primary residence. You make statements and sign documents that oblige you to that agreement from the very outset of negotiations, which means that if you lie, or you accidentally forget to live in that new house as your primary home, your contract, loan, etc. are fraudulent. That means not only that you are a cheater, but that the bank may renege on its agreement and the IRS may withhold your savings and perhaps slap you with an ugly fine. Worse, your neighbors won’t let their children play with your children.
Also, if you’re sort of upper- or middle-classish, forget about it. This incentive doesn’t pertain to you. There are income limits that apply to the first-time homebuyer tax credit. These vary according to your status (married, single, filing jointly, etc.), but if you’re buying a million-dollar home, you probably can’t expect the government to reward you, no matter how nice you are.
Best advice: get yourself organized and work with a trusted lawyer or accountant in order to pay and save your fair share of tax dollars this year.
Contact Joanna Dehn Beresford at truewrite@yahoo.com.
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