512-743-5434
Kris Colquette
REALTOR®
Smart Source Realty
Kris Colquette's Guide To: FOR SALE BY OWNER
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Tax Implications of
Selling a Home
Selling a
home can have a major impact on your federal and state tax returns.
Check with your tax consultant on the factors that may affect taxes resulting from the sale of your home. For example:
Whether you purchased the home or acquired it by gift or inheritance
Whether you used your home partly for business or rental
Costs associated with selling your home
Home improvements or additions, which
Gain from the sale of a prior home on which tax was postponed prior to the enactment of the federal Taxpayer Relief Act of 1997
The federal Taxpayer Relief Act of 1997 says when you sell your home you can keep, tax free, capital gains of up to $500,000 if you are married filing jointly or $250,000 for single taxpayers or married taxpayers who file separately. To qualify for the exclusion, you must have used the home as your principle residence for at least two of the prior five years. It is not a one time tax exclusion. You can use the exclusion as often as you meet the qualifications.
The federal Internal Revenue Service Restructuring and Reform Act of 1998 further clarified the law and says you can prorate the $500,000/$250,000 exclusion (not your specific gain) if unforeseen events, such as a job change, illness, or some other hardship forced you to sell before you meet the two-year residency requirement.
Many, but not all federal tax benefits are also available from state tax departments. Be sure to discuss your move with a tax professional familiar with state tax rules, especially if you are moving from one state to another.
-Adapted from the MetLife Consumer Education Center with assistance from the National Association of the Remodeling Industry.
Step 6. Close It
It might seem as though once a sale agreement has been signed that the selling process is complete. Not only is it not over yet, but some of the most complex aspects of a real estate transaction now begin.
A sale agreement sets not only a purchase price for the home, but also a series of terms and conditions. For instance:
Contracts routinely depend on the ability of a buyer to obtain financing, which is why most sellers prefer buyers with pre-approval letters from lenders.
A growing percentage of transactions involve a home inspection, or a physical review of the home by a trained and independent observer.
Lenders will establish numerous conditions before granting a loan. They will want a title exam, title insurance to protect against title errors, termite inspections, surveys and an appraisal to assure that the home has sufficient value to secure the loan.
The REALTOR® typically arranges required inspections and helps the owner prepare for closing.
When should you close?
With automation now available, closings can occur within a week in some
areas -- at least in theory. In practice, it takes time to arrange
financing, conduct inspections, obtain appraisals, locate replacement
housing, contact movers, pack and actually move.
While instant closings are not practical, neither are closings too far in the future. The problem with closings much past 60 days is that loan rates are difficult to lock in. If mortgage rates go up, it's possible that the buyer will no longer be able to afford the home and thus the deal may fall through.
The result of these considerations is that most homes close 30 to 45 days after a sale agreement has been signed.
What happens?
Closing -- or "settlement" or "escrow" as it is known in some areas --
is essentially a meeting where the closing agent (the party who conducts
settlement) takes in money from the buyers, pays out money to the owner
and makes sure that the purchaser's title is properly recorded in local
records along with any mortgage liens.
The closing agent reviews the sale agreement to determine what payments and credits the owner should receive and what amounts are due from the buyer. The closing agent also assures that certain transaction costs are paid (taxes and title searches).
Closing is also the time when "adjustments" will be made. For instance, suppose you've pre-paid taxes four months in advance. In this case, the closing agent will compensate you for the prepayment at closing by having the buyer pay you additional money.
It could also work in reverse. If you are behind on property taxes, the closing agent will reduce the money due to you at settlement by the amount of the unpaid taxes.
How do you prepare to
sell?
It's important to look at the sale agreement and review your
obligations. For instance, if you have agreed to paint a room or replace
the dishwasher, such work must be completed before closing. Your
REALTOR® can discuss your agreement and the steps which must be taken to
complete the transaction.
The closing agent will handle both the settlement papers and related documents.
Who Represents You?
One of the hot topics facing the world of real estate right now is the issue of agency. Some would have you believe that it really doesn't affect you, the buyer, and that nothing much has changed. But they are wrong.
The topic of agency is important to you because it answers the most basic and fundamental question that can be asked of any real estate professional: Who do you represent in this transaction?
Until that question is answered, you may be left with the impression that all agents who work with buyers actually represent those buyers, and that you have somebody going to bat for you in this transaction. Well, the issue of agency is important because without it, we can never be sure who represents who.
