Posted: 11 Oct 2012 08:55 AM PDT
Obviously you donâ€™t go buy a house unless you want to move and can afford it. But if you want to move and can afford to buy a new home, then there are some perks to buying or selling before the end of the year.
1. If you buy or sell a home before the end of this year, 2012, you will benefit from the Mortgage Debt Relief Forgiveness Act. This law exempts current homeowners from the hidden, serious income taxes that are normally incurred when mortgage debt is forgiven â€“ including in cases where an underwater home is sold short. A mortgage lender extends cash to a borrower when they make a mortgage on a home. If that debt is wiped out without actually being paid back, then the cash that was extended to that borrower is normally considered income by the IRS, and is taxed as such.
But when the real estate market crashed, the federal government enacted this Act to eliminate the thousands and thousands of dollars of income taxes the average American who loses a home to foreclosure or short sale would otherwise incur. Itâ€™s sort of the governmentâ€™s effort not to kick folks while they are down, and help them recover, financially, from these already traumatic events.
The act is set to expire on December 31, 2012. It could be extended. And with the election set to take place shortly before the expiration timeline, there is an increasing concern that the Act could end up falling through the cracks and not being extended.
If you need to sell an underwater home via a short sale, the time to list it was really a few months ago. But some servicers are expediting these transactions so that it might still be possible to get your short sale closed before yearâ€™s end. If so, youâ€™ll avoid the enormous tax burden that could result if the Act expires and you had to do a short sale in the future. (Note: there are several other, non-expiring exemptions from this mortgage debt tax â€“ if youâ€™re considering a short sale, talk with your tax advisor to see whether this urgent year-end deadline applies to you.)
And if youâ€™re buying in a market where many homes are still underwater, you might stand to benefit from the inventory changes that may result when sellers whoâ€™ve been trying to hold onto great â€“ but upside-down â€“ homes put them on the market in an effort to take advantage of the Act.
2. Reduced competition. What this means is that if you do happen to be kicking your house hunt into high gear right now, youâ€™re likely to face fewer competitors, and that means a lower incidence of multiple offers and lower likelihood of being outbid, if you live in a market where that has been taking place.
The converse is true for sellers: many banks are holding back on releasing REO inventory these days, and even some â€œregularâ€ sellers will hold off from listing during the holidays, waiting until after New Yearâ€™s. This may position you to have less competition from other sellers for the qualified buyers who, like you, are trying to close escrow before yearâ€™s end.
3. Some banks and asset managers handling short sales and foreclosures have motivation to move properties off their books and get transactions closed before the year end. This doesnâ€™t mean you can score a mansion for pennies, but it might get you slightly more consideration, responsiveness and speed than you would see in such a transaction earlier in the year.
4. Transaction-related tax deductions. First off, any mortgage interest you pay in 2012 will be deductible in 2013 â€“ while that might not seem like it could possibly be much, but you pay all of your mortgage interest from the date you close through the end of that month. And at the beginning of your loan, most of your monthly mortgage payment is interest, so that could tally up to be a nice deductible.
Second, if you prepay mortgage â€œpointsâ€ at closing in order to get a lower interest rate for the life of your mortgage loan, the IRS considers those points to be prepaid mortgage interest. If your contract requires the seller to pay points toward your mortgage, you â€“ the buyer â€“ can also deduct those points on your 2012 tax return. (Talk to your tax advisor and see if this will be true for you!)
Finally, there are other closing costs that are deductible, buyers, on the return you can file as early as January, 2013. The most notable of these are property taxes, but you might also have some moving cost deductions, if you relocated for work and moved far enough to meet IRS guidelines. (Again, consult with a tax professional. If you need one, call me, I can refer you to a good one.)
5. Interest rate certainty. The federal government, the Fed and other interest-rate impacting organizations have kept a very tight lid on mortgage rates throughout recent history in an effort to help our nation recover from the recession. But thereâ€™s no way now to know precisely how rates will change in the New Year.
Closing escrow on your home purchase before the year is over is the only failsafe way to lock in low rates now for the life of your home loan.
While you might not have 100 percent control over whether or not you can close escrow on your purchase or sale by December 31st, you probably have more than you think:
Consult your accountant or tax professional before making a large purchase. Make sure these incentives can help you. Then go buy or sell a house! Itâ€™s good for the economy : )
"Why Sell a House or Buy a House Before the New Year?" was brought to you by the outstanding agents at Register Real Estate Advisors - http://www.RREA.com.