Home sellers may encouter surprises

by Dan Krell © 2012

money to close on homeSo you’re planning to list your home in the spring, or maybe your home is already listed for sale…

In an effort to avoid surprises, you consult with your real estate agent and ask many questions. Your agent, also looking forward to a transaction without incident, tries to prepare you for the ups and downs of home selling. No matter how much preparation you and your agent do for the sale, there still can be surprises; here are the three often encountered surprises:

The home buyer failed to qualify for their mortgage:

Real estate agents often do not discuss the truth about lender pre-approval letters (lender pre-approval letters are not all the same). When you receive an offer on your home, there is usually a “pre-approval” letter from a mortgage lender indicating that the buyer is qualified to obtain a mortgage to purchase your home.

Although the pre-approval process typically checks the buyer’s credit, the process sometimes varies when it comes to verifying the buyer’s income and assets. Although many loan officers exercise due diligence and collect income and asset documentation prior to issuing a pre-approval letter; some loan officers feel confident to issue a pre-approval letter solely on the basis of the buyer’s verbal accounting of their income and assets. Make sure your agent is in contact with the buyer’s loan officer; and ask if all the necessary documents have been reviewed before the pre-approval letter was issued.

Unanticipated withholding tax at closing:

Besides negotiating closing costs, your agent will explain that there are additional fees and costs that you should expect to pay at closing. A surprise often awaiting the unsuspecting home seller is a withholding tax; such as the Maryland non-resident seller withholding tax, the Foreign Investment in Real Property Tax Act, and beginning in 2013- the unearned income tax outlined in the Patient Protection and Affordable Care Act of 2010. Additional information can be obtained from the Comptroller of Maryland, and the Internal Revenue Service, and your tax preparer or CPA. Before listing your home for sale, consult your tax preparer or CPA to determine your tax liability for any additional real estate related withholding tax.

Your home does not appraise at contract price:

One of the outcomes of the financial crisis was the Home Valuation Code of Conduct (HVCC). The HVCC was devised to establish increased accountability and independence in the appraisal industry. You might think that since placing additional regulation on the appraisal industry, appraisals should be more consistent. However, there has been much criticism about the inconsistency among appraisals and difficulty in understanding the standards and methodology used in determining a home’s value. The issue may partly stem from appraisal management companies that are sometimes used by lenders to comply with the HVCC, while the issue may also partly stem from lenders imposing specific underwriting guidelines on various loan products. In preparation, your agent should gather valid sales comparables that can be given to the appraiser as rationale for the contract price.

No one like surprises, so hopefully you’re prepared for the ups and downs of selling your home in today’s market. Although some real estate agents may pride themselves on how they handle surprises to put out the “fires;” the truly skilled agent can anticipate most situations to minimize the surprises that can occur during a real estate transaction.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of September 24, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

Medicare tax on real estate transactions

medicare taxAs pundits and commentators speculate about the Supreme Court’s opinion on the Patient Protection and Affordable Care Act of 2010 (PPACA), the National Association of Realtors® (NAR) reminds us that the 3.8% tax on unearned income imposed by PPACA is not a transfer tax. This is a tax collected on “unearned income” is to be applied to the Medicare Trust Fund (e.g. a medicare tax).

Although the new tax is not a transfer tax, it could apply to your home sale. Unlike transfer taxes, which are collected by state and local governments when real property is transferred between individuals; the “Medicare tax” is not calculated on the sale price nor is not applied to the proceeds from every real estate transaction. Rather, the tax provision kicks in when specific thresholds are met.

Incidentally, even though a real estate transaction may meet the threshold to be taxed under the new Medicare tax; it’s not the only “unearned income” that may be taxed under this provision. According to the NAR “Medicare tax faq”, “Unearned income is the income that an individual derives from investing his/her capital. It includes capital gains, rents, dividends and interest income. It also comes from some investments in active businesses if the investor is not an active participant in the business. The portion of unearned income that is subject both to income tax and the new Medicare tax is the amount of income derived from these sources, reduced by any expenses associated with earning that income. (Hence the term “net” investment income.)”

real estate - doctor officeTo clarify, Henry Paula explains the Medicare tax in his January 2011 article (Planning for affluent taxpayers under the 2010 healthcare reform. The CPA Journal, 81(1), 46-47); “Under the Patient Protection and Affordable Care Act (ACA) …there is a new 3.8% tax imposed on the net investment income of certain individuals, estates, and trusts considered to be high earners.”…“For tax years beginning after Dec 31, 2012, a 3.8% tax, called the Unearned Income Medicare Contribution, will be imposed on the lesser of net investment income or an individual’s modified adjusted gross income in excess of: $250,000 if married filing jointly, $125,000 if married filing separately, or $200,000 if filing single.” Mr. Paula summarizes, “The 3.8% tax will affect taxpayers with business activity income from activities that are passive for the particular taxpayer and generate net investment income that, when combined with other income, is in excess of the thresholds…”

The NAR gives this example (from the Medicare tax faq), “If AGI for a single individual is $275,000, then the excess over $200,000 would be $75,000 ($275,000 minus $200,000). Assume that this individual’s net investment income is $60,000. The new 3.8% tax applies to the smaller amount. In this example, $60,000 of net investment income is less than the $75,000 excess over the threshold. Thus, in this example, the 3.8% tax is applied to the $60,000… If this single individual had AGI [of] $275,000 and net investment income of $90,000, then the new tax would be imposed on the smaller amount: the $75,000 of excess over $200,000.”

Aside from the anticipation of the Supreme Court opinion, the new Medicare tax will begin in 2013. If you’re planning a home sale, consult your CPA, financial planner, and any other tax specialist to determine if (and how) the new Medicare tax applies to your situation.

Original located at https://dankrell.com/blog/2012/04/05/medicare-tax-on-real-estate-transactions-and-other-unearned-income/

By Dan Krell

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This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.