Reminder on Capital Gain Tax Law Change for Primary Residence

A change in the Housing Assistance Tax Act of 2008 changed the rules regarding capital gains on the sale of a primary residence.  Under the prior system, homeowners were able to exclude up to $250,000 ($500,000 for married couples) worth of capital gains on the sale of a primary residence.  One of the rules in order to qualify for the capital gain exclusion was that a property owner had to use the real estate as a principal residence for at least two of the previous five years.  As such, homeowners with rental and vacation property began to sell their primary residence without capital gain and then moved into their second home or rental property so that they could avoid capital gain upon sale of that property also. 

 

The Housing Assistance Act of 2008 sought to close that loophole.  The new law will allow the exclusion of a portion of the capital gain based upon a new formula that seeks to take into account years that the real estate was not used as a primary residence.  Use of the real estate as a primary residence has been termed "qualifying use" and use of the real estate for other purposes is called a "non-qualifying use".

 

Beginning on January 1, 2009,  capital gains are determined based upon the following formula:

(Time of non-qualifying use after 1-1-09) divided by (time of total ownership) = % of exclusion

One benefit here is that non-qualifying use for periods before January 1, 2009 do not count for purposes of making the calculation.  Obviously, properties that have been used exclusively as a primary residence will be eligible to exclude the entire gain up to $250,000 ($500,000 for married couples).

As a result, property owners who have held non-primary residence real estate for long periods of time can still take advantage of major tax savings by converting non-qualified property into qualified property (because all non-qualifying time prior to 1-1-09 is not included).  It makes sense to evaluate capital gains strategy based on this law.

Hardship Letters are Hard

In the wake of the housing bubble, many homeowners have sought various non-foreclosure remedies from their lenders. These range from loan modifications to short sales and deeds in lieu of foreclosure.

In almost all instances, the loss mitigation department of the lender will require, among other things, that the delinquent borrower produce a "hardship letter". Google the term and you will find LOTS of examples. In fact, there is one very common one that seems to be repeated over and over on many sites. Here's an old but excellent article on how "Not to write a Hardship Letter". The article actually picks apart this "common" hardship letter and explains what a bank loss mitigation specialist is looking for when they read a hardship letter.

Will County Foreclosure Mediation

Just hours ago, the Illinois Supreme Court announced a program that will use mediation as a means of possibly reducing the burden of foreclosures in Illinois. The program will begin in the Circuit Court of Will County. Court has proposed this new program as a way to prevent vacant and abandoned homes and to keep families in their homes. The program will require any residential foreclosure complaint to be scheduled for mandatory pre-mediation. The mediation will focus on determining, with an outside mediator, whether or not a loan modification or other resolution can be found. If not, the mediation can be used to facilitate a consent foreclosure or the waiver of any deficiency against the borrower. Lenders will be required to participate in the program in food faith or face sanctions, including the possible dismissal of the foreclosure.

The program will be paid for by an increase in plaintiff's filing fees for each foreclosure from $276 to $426.

Fannie Mae's new rules for post-shortsale buyers

Many people wonder "what is the effect of a short sale on the ability to get a loan in the future"?

Fannie Mae, the company that securitizes mortgage loans, making them more affordable and the entity largely responsible for the guidelines that regulate most conventional mortgages, has provided a bit of an answer. Fannie Mae has released announcement SEL-2010-05 which sets forth the new requirements for home buyers to obtain a new loan if they have participated in a "pre-foreclosure event" (ie. a pre-foreclosure sale, a short sale, or a deed in lieu of foreclosure). Until now, there was no policy on short-sales. The new regulations go into effect on July 1, 2010.

For borrowers with a pre-foreclosure event in their past, there will be a waiting period before a new loan can be obtained. The amount of downpayment provided by the borrower will affect the length of the waiting period. The periods are as follows:

20% downpayment - 2 years
10% downpayment - 4 years
less than 10% downpayment - 7 years

The waiting period begins upon the completion date of the pre-foreclosure event. In addition, after 2 years with 90% LTV and with extenuating circumstances, a lender may be able to obtain an exception to the waiting period.

Guidelines can change on a regular basis, but for know, property owners considering a short sale or a deed in lieu of foreclosure will at least have an idea of some of the consequences of the pre-foreclosure event.

Pre-Closing Possession

For one reason or another, a Buyer may need to take possession of real estate before a closing. For instance, if there is a "dry-closing" (ie. one where the lender fails to fund but all other parts of the closing are done and the lender's funding should take place shortly thereafter), a Seller may be willing to allow a Buyer to take early possession of real estate. Most attorneys disfavor pre-closing possession. Why? Mostly because of liability concerns. What if the deal fails to close? What if the Buyer discovers a condition in the property that causes the Buyer to decline to close? What if the Buyer burns down the property? What if the Buyer's property moved into the real estate is stolen?

A proper and well thought out pre-closing possession agreement can address some of those concerns. While granting possession only at the time of closing is preferable, sometimes pre-closing possession is necessary.

What happens if, having transferred possession, the property is destroyed? In such as case, the Illinois Uniform Vender and Purchaser Risk Act shall apply. Unless specifically disclaimed or modified, all real estate contracts in Illinois are subject to the Act.

The act provides first that when neither legal title nor possession of the real estate have been transferred, in the case that all or a material portion of the real estate are destroyed without purchaser's fault, the Seller can not enforce the contract against the Buyer.

The act makes provision, however, for pre-closing possession. When either legal title or possession of the real estate has been transferred, in the case that all or a material portion of the real estate are destroyed without Seller's fault, then in such a case, the Buyer is not relieved of the duty to purchase the real estate.

Thus, if a buyer takes pre-closing possession of a property and the real estate burns down, the Buyer is still on the hook to buy the property.

Taxes and taxes and taxes

Many folks will be seeing the first installment Cook County real property tax bills showing up in their mailbox shortly. This year, the County is looking for 55% of last year's full year bill. Then, when they raise your taxes in the fall, it will not seem like such a shock. Thanks for that Mr. Stroger.

In addition, the Assessor has implemented a bit of a shell game for reassessments. Beginning in 2009, the County has adjusted the formula used to arrive at an assessed value. Generally, the county has reduced the number of property classes and reduced the percent of fair market value for the classes to arrive at an assessed value. This can be confusing because a mere review of the assessor’s raw information comparing assessed values for 2008 to 2009 (or thereafter) will not be effective to adequately assess the change in assessed value.

To really have an “apples to apples” comparison of the two amounts, it is necessary to “back out” the figures to the assessor’s fair market value. A truly detailed review of the situation would compare the client’s increase to the median increase in their township.

Finally, residents in the north and northwest suburbs will be receiving their reassessment notices shortly. Be on the lookout and be aware of the time limits to appeal these taxes.

Relief for Tenants when Landlord is Being Foreclosed

Effective January 1, 2008, the State of Illinois has enacted Public Act 095-0262 amending 735 ILCS 5/15-1701 of the Code of Civil Procedure to allow tenants a right of possession during a foreclosure. Under the old law, tenants could be evicted shortly after the entry of an order for possession in the foreclosure action.

Under the new law, in the case of a foreclosure where a tenant is current on his or her rent, an order for possession entered in a supplemental petition for possession in the foreclosure must allow the tenant to retain possession of the property covered by the tenant's rental agreement for the shorter of: (1) 120 days following the notice of the hearing that has been properly served upon the tenant or (2) through the duration of the tenant's lease.

As a result, tenants will have at least the balance of their lease if less than 4 months remain or up to 4 months after they receive notice that their landlord is in foreclosure. Tenants will still have to pay their rent. The law provides the additional right to possession only if the tenant continues to pay rent in full during the 120 day period. In addition, the right only extends to a case of "foreclosure where the tenant is current on his or her rent". This can lead to a few questions.

Who is entitled to rent during the pendancy of the foreclosure action? Is it the landlord, the mortgage holder foreclosing the loan, or the court appointed receiver? Generally, payment should be made to the landlord. However, many landlords in arrears refuse to accept rental payments. In such a case, the tenant should be careful to tender the rent payment to the landlord. If the payment is denied, the tenant should tender the rent payment to the court appointed receiver and/or mortgage holder. In either case, the tenant should get a receipt for payment! If neither the court appointed receiver/mortgage holder or the landlord will accept the rent, the tenant should appear in court and attmept to have the court order one of the parties to the suit to accept the rent.

Do we need to get a C.L.U.E.?

All real estate buyers will be required by their lender (and good sense) to obtain hazard insurance. In most cases, the insurance is an afterthought, but maybe it should not be. The Multi-Board 4.0 Real Estate Contract contains a provision that allows a buyer to check with an insurance agent to determine if the property being purchased can qualify for form HO-3 hazard insurance at "preferred permium rates" and provides an out from the contract if that detemination is made and timely notice provided to the seller.

When underwriting a homeowner's policy, insurance companies usually review claims information and can deny coverage to a potential buyer based upon prior claims at the property address. In such a situation, a buyer will be forced to purchase "non-standard" coverage or coverage through the government, usually at extremely high premium rates.

In any event, in order to make a determination about policy availability at preferred rates, Buyers need to get involved with an insurance agent much earlier in the buying process. Generally, the insurance agent will order up a "C.L.U.E. report". C.L.U.E. stands for "Comprehensive Loss Underwriting Exchange" which is basically a database that tracks prior claims against a property. The company that runes C.LU.E. currently indicates that the report has information about the most recent seven years of claims activity.

This information can be interesting potential buyers and may be a valuable resource when purchasing a home. A Seller can now obtain a version of a C.L.U.E report stripped of personal information (such as social security numbers) for their buyers for about $20. The information contained there can be valuable to prevent the purchase of a lemon or to provide piece of mind to a buyer that there is not a history of problems at a particular property. In any event, insurance inquiries must be made earlier in the process.

When do I call an attorney to help sell my house?

When do you need to get an attorney involved in selling your house? The quick answer is right away.

The first time you should consult an attorney is before you sign a listing agreement with a realtor. Many of the "standard" or "form" listing agreements are heavily slanted against the seller or contain provisions that surprise sellers when they actually find out what the agreement says, usually when it is too late to do anything about it.

Most of the listing agreements in the Chicagoland market indicate that a real estate broker's commission is earned once the broker has produced a "ready, willing and able" purchaser of your property. "But what if the deal does not close, I don't owe a commission, right?" Wrong. If your buyer defaults on the transaction after satisfying all of the buyer's contingencies (ie. the buyer defaults and fails to close), the seller likely owes the real estate brokers a commission.

In reality, many real estate brokers do not try to collect this commission. They want to keep goodwill with their seller client and they understand that they will get a commission when the property does eventually sell. But what about the selling agent who is out a commission and what about the listing agent who has had a falling out with the seller during the course of a deal. They may want their commission... and they are entitled to it.

There are more than a few reasons to take a look at the listing agreement before it is signed. Among others, the attorney can assist a seller to determine the rights and obligations of the seller if the seller finds the buyer without the help of the agent; if the seller has any right to avoid a commission for people who looked at the house before it was listed; and in the event that the real estate agent acts as dual agent. Other questions can be answered such as how does the seller terminate the agent relationship?; is a commission owed to the agent if the seller gets a contract after terminating the agent?; or are there any "hidden fees"? (sometimes a commission will actually be "5% of sale price plus a $225 processing fee). In most cases, under the terms of the "standard" listing agreement, the real estate agent will come out on top in regard to those issues.

Many real estate agents are excellent to work with and understand some of the shortcomings of the form listing agreement. In fact, many are very willing to make modifications to the agreement so that the seller can preserve some rights and better deal with some of the situations which can arise during the course of an agency agreement.