Home Sellers Guide

Tax Tips For Selling And Buying A Home*

The following Tax tip outline is provided to help you understand the basic federal income and capital gains tax ruses that apply when you purchase or sell a principal residence. This outline is not intended to provide tax advice. You should consult your tax advisor if you have any questions regarding any terms in this outline.

CAPITAL GAINS/LOSSES ON SALE OF A PRINCIPAL RESIDENCE

A home, which you use as a principal residence, is a capital asset like stocks or other investment property. When you sell that home, you will be required to report the sale to the IRS on your federal income tax return for the year of the sale.

Fortunately, up to $250,000 of gain from the sale of a residence by a single person is tax-free. For certain couples filing a joint return, the tax-free gain limit doubles to $500,000. The seller must have owned and used the home as his principal residence for at least two out of the five years before the sale. In most cases, the taxpayer can only take advantage of the provision once during a two-year period. However, a reduced exclusion is available if the sale occurred because of a change in place of employment, health, or other unforeseen circumstances. Special rules also apply if you marry someone who has recently used the exclusion provision, if the residence was part of a divorce settlement, if you inherited the residence from your spouse or if you have taken depreciation deductions on the residence.

The $250,000/$500,000 exclusion replaced the two-year rollover rules. This change is effective for sales occurring after May 6, 1997. Thus, you no longer have to reinvest the sales proceeds by buying a more expensive home. However, homeowners with profits of more than the $250,000/$500,000 limits could have to pay tax on the excess even though the entire sales proceeds are "rolled over." The new rules also replace the one-time exclusion or $125,000 for taxpayers over age 55.

Homeowners who sell at a loss may not claim a deduction on their returns.

*Williams, Mullen, Christian & Dobbins, Attorneys at Law provided the above information.

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Highlights Of Sales Contracts

Real estate sales associates or brokers normally prepare real estate sales contracts and submit it to the purchaser and seller, usually through their agents, for signatures. The following components of a sales contract have been purposefully generalized and where there is any doubt as to the legal effect or interpretation of any terms or conditions of a contract, an attorney should be consulted.

EARNEST MONEY: The contract customarily provides for the purchaser to deposit a sum to be applied to the purchase price or closing costs. This sum is known as the earnest money deposit and is evidence of the purchaser's good faith to the seller. A deposit of $1,000 to $25,000, depending on the sales price of the property, usually represents a suitable deposit. The exact amount, of course, is determined by what is acceptable to the seller. The deposit must be deposited in an escrow account in accordance with Virginia law once the contract has been fully executed.

FINANCING: A contract often has a financing clause, which describes the type of financing, amount of loan, term and desired interest. It will usually state that the purchaser obtain a new or assume an existing Conventional, VA or FHA loan secured by a deed of trust on the property. If the purchase contract is contingent upon financing, and the specified financing is not approved by a lender, then the contract may be voidable with your earnest money deposit returned. For specific information, consult your Joyner Fine Properties Sales Associate.

ITEMS CONVEYING WITH THE PROPERTY: The items of personal property belonging to the seller, which the purchaser wishes to remain with the property, should be clearly stated in the purchase contract. Items that do not normally convey include the refrigerator, washer, dryer, and area rugs. Please consult your Sales Associate for specifics.

SETTLEMENT: The contract should specify the settlement date. On that date, the seller and purchaser agree to fully comply with the terms of the contract. In most cases, possession and occupancy by the buyer is given on the date of settlement. Other arrangements should be specified in writing and acknowledged by all parties.

CLOSING COSTS AND PREPAID ITEMS: Normal closing costs incurred by the purchaser are: survey, attorney's fees, title insurance, recordation costs, appraisal, credit report, discount points, and the loan origination fee. Prepaid items are: daily interest charges, homeowner's insurance, insurance escrow, tax escrow. The purchaser may also require by the lender to obtain Private Mortgage Insurance (PMI) depending on the loan to value ratio.

VA AND FHA CONTRACTS: The Federal Housing Administration and Veterans Administration both require certain language in sales contracts when the buyer is obtaining government financing. Check with your Joyner Fine Properties Sales Associate for specifics.

ADJUSTMENTS: Rents, taxes, insurance and interest on existing encumbrances, monthly condominium fees, homeowner association dues and other operating charges are pro-rated to the date of settlement. Generally, the purchaser also purchases the oil in the tank at settlement.

INSPECTIONS: Purchasers may choose to have workmen of their choice, at their expense, inspect the plumbing, heating/cooling and electrical systems, roof, structural conditions, soil conditions, hazardous materials, etc. If the purchaser chooses to have these inspections done, it must be made a part of the purchase contract. Time periods will apply and all inspections must be completed as specified in the purchase contract.

TERMITE INSPECTION: The seller agrees to furnish, at settlement, verification from a recognized pest control company, that there is no evidence of termites or other wood destroying insects and/or damage. In the even there is active infestation and/or damage, the seller, at their expense, will usually be required to have the property treated and bonded for a period of one year.

CONDOMINIUM ASSOCIATION APPROVAL: If the sale is subject to the approval or right of first refusal of the Council of Unit Owners or Board of Directors of the Condominium, the seller should agree to present the contract to such Council or Board immediately for their action or consideration. In the even the sale is disallowed, by the appropriate condominium authority, the seller and/or agent will return any money or deposits to the purchaser and the contract will be null and void.

PROPERTY OWNERS ASSOCIATION ACT: If the property is located within a development which is subject to the Virginia Property Owners Association Act (Sections 55-508 through 55-516 of the Code of Virginia), the seller must provide for the purchaser, a disclosure packet from the Property Owners Association unless a waiver of this right is signed by the purchaser.

MECHANICS LIEN: All contracts are required by Virginia Law to include a notice regarding mechanics liens.

SOIL CONDITIONS: Purchasers should be aware that varying degrees of expansive clay soils (also called "Shrink-Swell" soils), found in many areas of the country, have been identified in parts of the Metropolitan Richmond area. No representation is to be made as to the presence or absence of such soils. In addition, there are abandoned mine shafts located in the area, and no representation is made as to the presence or absence of such mineshafts. Purchasers have the opportunity to have the property and all components thereof, including soil, inspected at their expense.

NOTE: THESE OBSERVATIONS ARE PRESENTED AS A GENERAL OVERVIEW ONLY. THE EXACT TERMINOLOGY AND FORMAT OF THE PURCHASE CONTRACT WILL VARY AND MAY CONTAIN ADDITIONAL CLAUSES FOR THE PROTECTION OF BOTH THE PURCHASER AND SELLER.

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Notice To Prospective Real Estate Sellers

BEFORE ENTERING INTO AN OFFER TO SELL, YOU SHOULD KNOW:

LEGAL REQUIREMENTS: Virginia Law requires that in order to be enforceable, all contracts for real property must be in writing. There is a contract form that can be shown to you. The form a REALTOR® recommends you to use can be modified in any way to accommodate the needs of the parties. You have the right to legal counsel and may seek such at any point.

FINANCING AND INSURANCE: Mortgage rates and associated charges vary with financial institutions in the marketplace. The purchaser has the right to select a lender and the right to negotiate terms and conditions of the loan. Such terms may be subject to the lender's requirements. The purchaser may ask you to contribute financially towards closing costs and/or loan discount points. Once you and the purchaser have agreed on the terms of the contract, the loan terms may not be changed without your written consent. The lender will require the purchaser to buy hazard insurance on the property from the insurance company of their choice, subject to the lender's approval. The purchaser will also be required to purchase lender's title insurance, and may wish to purchase owner's title insurance.

MASTER PLANS: In the purchase offer, the buyer may include the right to review the applicable master plan for the location in which they intend to purchase, including maps showing planned land uses, roadways and highways, and the location and nature of proposed parks and other public facilities. This can be viewed at the various jurisdiction-planning offices and at some local libraries.

HAZARDOUS MATERIALS: Hazardous materials could affect properties you may inspect as a potential seller. Realtors generally do not have the technical expertise to advise you as to whether or not such materials are present. Information pertaining to hazardous substances is available from the United States Environmental Protection Agency (EPA), or the Virginia Department of Health. For further information, you can contact local health departments, the Virginia State Department of Health, and the U.S. Environmental Protection Agency (example: Radon Hotline @ 1-800-SOS-RADON). As a condition of a purchase offer, the buyer may include the right to employ experts to inspect the property for various conditions and to provide and analysis of possible hazardous materials within that property. If such hazards exist, you may be asked to have the hazardous materials removed or the buyer might elect not to go forward with the purchase offer.

CONDITION OF THE PROPERTY: The purchaser has the right to include in the purchase offer a provision to employ, at their expense, an expert or experts of their choice to inspect all components of the property including the soil and provide an analysis of it's condition. You have the right to ask for a copy of the report should the purchaser request any repairs. The buyer may also request a pre-settlement or pre-occupancy final "walk through" inspection of the property.

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Settlement Costs For Sellers

Settlement costs will vary depending on the selling price and terms agreed upon in the purchase contract. The list below includes costs typically paid by the seller. Pay off of any existing liens or mortgages should be included in your calculations.

BROKERAGE FEE

As agreed upon.

DEED PREPARATION/ATTORNEY'S FEE

 Approximately $125 - $200 to prepare the deed for transfer of ownership.

LIEN RELEASE FEE

Approximately $35 per lien.

GRANTOR'S TAX

$1.00 per $1,000 of sales price rounded to nearest $.50.

PEST CONTROL INSPECTION

Required for closing, usually $50 - $75 for report. Any treatment and/or repairs are additional.

WELL and SEPTIC INSPECTIONS

If the property is serviced by a well and/or septic tank, the lender will require an inspection. In the Richmond area, it is customary for the seller to pay for and have these inspection performed by a licensed contractor.

PROPERTY OWNER'S ASSOCIATION PACKET

$75 - $100 to obtain packet from neighborhood association per the Virginia Property Owners' Act.

 

PREPAYMENT PENALTY

Fee paid to mortgagee for paying off mortgage early, if required.

 

UNPAID INTEREST ON LOAN

Any unpaid interest due on the mortgage pro-rated to the date of settlement.

 

PRO-RATED PROPERTY TAXES

Real estate taxes due on the property for period of time during the year that you owned the property.

 

SALES CONCESSIONS

Any concessions agreed to be paid on behalf of the buyer during contract negotiations such as: loan origination fees, discount points, and/or buyer closing costs such as appraisal fees, recording fees, survey fee, etc. You may also agree to contribute financially towards repairs to the property.

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Closing Costs

Settlement costs will vary, depending on the financing arrangement and on selling price of the home. Typically, closing costs paid by the buyer include:

LOAN ORIGINATION FEE

1% of the loan amount.

 

DISCOUNT POINTS

1% to 2% of the loan amount, depending on the mortgage interest rate.

 

APPRAISAL FEE

$350 conventional; $300 FHA

 

CREDIT REPORT FEE

$50

 

PREPAID MORTGAGE INTEREST

The interest prepaid by the purchaser for the period between the closing date and the end of the current month.

HAZARD INSURANCE PREMIUM

Lenders require that the hazard insurance be prepaid for one year and that two additional months' premium be held in escrow to cover the first two months of the following year. The first year's premium is approximately .3% of the selling price.

 

CITY/COUNTY PROPERRTY TAXES

A reimbursement to the seller for prepaid property taxes covering the period between the closing and the end of the tax period.

 

TITLE EXAM/CLOSING FEE

The attorney's fee is generally $350 to $500.

 

TITLE INSURANCE

A one-time premium, approximately .4% of the selling price.

 

PRIVATE MORTGAGE INSURANCE

Insurance required by lenders, paid for by purchasers, for loans with loan to value ratio greater than 80%.

 

RECORDING FEES AND TAXES

These fees cover recording of the deed and the mortgage with the City or County and the State. They are approximately .4% of the selling price.

 

SURVEY

The fee for the survey, if required, will be in the range of $200 - $250. The figure will be higher if acreage is involved.

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The Closing Process

Preparation and processing of all necessary documents for the transfer of ownership are prepared by the attorney/settlement agent and completed at closing. Be sure to select an attorney/settlement agent EXPERIENCED in title work and real estate settlements.

The attorney/settlement agent will examine the title and report upon it's condition, conduct settlement in accordance with terms of the purchase contract and, if applicable, the letter of instruction from the lending institution. The attorney/settlement agent will also apply for mortgage title insurance for the lending institution if such insurance is required as part of the transaction and obtain an owner's policy of title insurance for you. If required, a survey of the property will be ordered.

The attorney/settlement agent will account for all funds, including pay-off of any prior liens, and will disburse funds in accordance with the terms of the purchase contract and the loan instructions.

• The attorney/settlement agent will have received instructions from the lender as to the specific escrow expenses and will be able to provide you with the amount of the total cash needed to complete your purchase. Since it is necessary for you to bring a CERTIFIED OR CASHIERS CHECK, (generally made payable to the attorney/settlement agent) to closing, please contact your attorney/settlement agent at least two days prior to the actual closing date for the amount due.
• The lender will require hazard insurance on the property. Arrange for hazard insurance on your new property and provide your attorney/settlement agent or title company with the name of your insurance company/agent several weeks prior to closing.
• You must make arrangements for the utilities to be transferred to your name. We suggest that you contact them at least a week prior to settlement so that service will be assured on moving day. Your Joyner Fine Properties Sales Associate can provide contacts and phone numbers for connections, if needed.
• The Real Estate Settlement Procedures Act (RESPA), which applies to most residential real estate sales, requires that closing costs and all other costs associated with the sale, transfer and financing of the property be disclosed to you on a prescribed Uniform Settlement Statement. The various line items on the settlement statement are assigned to the purchasers or the sellers in accordance with provisions of the contract being settled. A copy of the Uniform Settlement Statement, sometimes referred to as the HUD 1, follows.

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Moving Checklist

BEFORE YOU LEAVE

Address Change

Bank

Insurance

Utility Companies

Delivery Service

Medical, Dental, Prescription Histories

Schools

Pets

AND DON'T FORGET TO:

AND ON MOVING DAY:

AND AT YOUR NEW ADDRESS:

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