Rain Wallace…,  in Salt Lake City, UT

Short sale contracts and tax credits.

Asked by Rain Wallace NMLS#233309, Salt Lake City, UT Thu May 6, 2010

Does anyone know when a short sale is under contract prior to April 30th with the buyer and the seller; but does not have all the banks final approvals for the sale documented by that day, will this still qualify for tax credits, if everything else fits the critera?

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Daniel Walker, Agent, Salt Lake City, UT
Thu May 6, 2010
BEST ANSWER
The IRS defers to local contract law. In Utah, a mutually agreed upon contract, in writing, signed by the parties is binding and considered to be "under contract" or "pending". The real estate purchase contract is between the seller and buyer only. The bank does not sign the contract. The bank or 3rd parties are not principals in the transaction. The short sale addendum, used in the contract creates a contingency that makes it possible for either buyer or seller to cancel at anytime before 3rd party approval. After 3rd party approval occurs, only the buyer may cancel according to the provisions on the contract. (due diligence deadline, etc). The 3rd party can refuse approval which in most cases will cause the contract to fail. To qualify for the tax credit, the buyer must be under contract by April 30, 2010 and must close on the same property by June 30, 2010. A backup offer or 2nd position offer is not considered to be "under contract".

Dan Walker
Walker Realty
Broker/Owner
Salt Lake City UT
CRS, ABR, GRI, CNHS, e-PRO
http://www.athomeutah.com
http://www.therealestatereportcard.com
801-288-2260
0 votes
Debbi Love, Agent, Midvale, UT
Thu Jun 3, 2010
Thanks Tara and Dan...that was exactly my point before. If the contract closes, it was executed and it was obviously binding...who can argue with that? If it doesn't close, it doesn't matter.
0 votes
Tara-Nicholle…, Agent, Alameda, CA
Sun May 16, 2010
I happen to agree that the contract is binding at the time buyer and seller sign it, though contingent on the bank's approval, from a contract law perspective.

HOWEVER, from a more practical perspective, my experience with clients collecting the tax credit leads me to believe that if you have a deal where the buyer's qualify for the credit based on being first timers, income, etc., the sale closes by June 30th, and the contract is dated by April 30th - the IRS is highly, highly unlikely to reject the credit on grounds that the contract was not binding if all else is met. As a matter of fact, the IRS does not request to see any sort of approval letter from the bank, and the short sale contract does not have a place for the bank to sign, so on a contract that was executed by the parties by the deadline but did not have bank approval by that time, there's nothing "missing" from the contract that would render this an issue.

That said, the IRS does audit claims of the tax credit A LOT, but less now that they are requiring the HUD-1 to be submitted with the tax return. The fraud cases tend to be around people who didn't meet the guidelines for qualifying as a first-timer or a move-up owner who has lived in their home for the requisite period, or people who simply never actually bought a house (i.e., never closed escrow).

And here's the other thing - buyers who want the credit, in general, should be referred to their CPAs for a definitive opinion about whether they qualify! Sounds like that's the route you ended up taking, Rain, and wisely so.
0 votes
Daniel Walker, Agent, Salt Lake City, UT
Fri May 7, 2010
Well, this is certainly turning into quite the exercise. Let me attempt to address this question first.

1. Lauren asks....Do you consider a listing to be "under contract" when you have an offer submitted to the bank (prior to approval)? Dan says "No. I don't consider it to be under contract." Well, why not? (a reader or Lauren might ask....LOL!). Well, the answer is twofold. part a, if you will....When a property goes under contract and the status gets changed on the MLS to under contract, it disappears from the public view. According to rules and ethics from the National Association of REALTORS and the local MLS, the seller can no longer market the property to anyone else once they have engaged a buyer and accepted a binding contract. Even though the contract may still have some contingencies, it's status is updated or changed to "under contract" and removed from further public consideration. Because of the volatility and uncertainty involved in selling AND buying a property where the seller is attempting one or more short payoffs to one or more entitites, the National Association of REALTORS has ruled that

a. A seller may be under contract with only one buyer at a time(hence the recent creation of the Backup position short sale addendum).
b. Because the outcome and time-frame of a short sale is so unpredictable, the NAR says the seller or buyer may cancel their contract at any time prior to 3rd party approval AND that the seller has the right to continue to market the property AND seek other offers. so.....
b. The property could not be updated to the under contract status because the seller has the right to still market the property and accept other offers! The seller could not continue to market the property if the property were under contract.

Caveat 1:.....the seller, if (he or she or they) chose, could tell the agent to place the property under contract, and cease to show it or take any more offers!
Caveat 2: the seller could cancel any offer at anytime in order to place a better offer that was accepted in backup position in first position. (more agents should urge their seller to do this). translated...more agents should uphold their fiduciary to the seller better than they do and those agents know exactly who I'm talking to....

So in conclusion.....
1. the short sale addendum allows the seller to be under contract with only one buyer at a time
2. the short sale addendum allows the seller the option of continuing to market the property, making it impossible to put the property under contract if the seller elects to continue to market the property.
3. A real estate purchase contract signed by the seller and the buyer is an enforceable, binding contract...whether the short sale addendum is part of it or not.

The status of a property on the MLS does not provide the evidence to the IRS for the tax credit,
IT IS THE SIGNED CONTRACT BETWEEN THE BUYER AND SELLER! AND/OR THE SETTLEMENT STATEMENT!

Again, go back and read the IRS web page.....

Oh, and by the way, I'm never too busy for any of your referrals!

Dan Walker
Walker Realty
801-288-2260
http://www.AtHomeutah.com
http://www.therealestatereportcard.com
Dan@AtHomeUtah.com
0 votes
Lauren Dahl, , Salt Lake City, UT
Fri May 7, 2010
Dan, thanks for clarifying that for us "girls." ;)

I think our question is still whether or not it's a binding contract until it's approved by the bank. Do you consider a listing to be "under contract" when you have an offer submitted to the bank (prior to approval)? I don't. I simply change the status on the MLS to "under 3rd-party review."
0 votes
Daniel Walker, Agent, Salt Lake City, UT
Fri May 7, 2010
Girls, please see this link
http://www.irs.gov/newsroom/article/0,,id=204671,00.html

I will take what is printed on their website for what it's worth. It really doesn't have to be this hard.

taken from the link provided...


* You must have bought — or entered into a binding contract to buy — a principal residence on or before April 30, 2010.
* If you entered into a binding contract by April 30, 2010, you must close (go to settlement) on the home on or before June 30, 2010.

Dan Walker
Walker Realty
Broker/Owner
Salt Lake City UT
CRS, ABR, GRI, CNHS, e-PRO
http://www.athomeutah.com
http://www.therealestatereportcard.com
801-288-2260
0 votes
Lauren Dahl, , Salt Lake City, UT
Fri May 7, 2010
Rain--thanks for sharing that! I think you made my point perfectly. I originally thought that all you needed was a signed offer. However, when I actually got in the situation of HAVING a signed offer on one of my listings from a buyer, I told the buyer to default to his agent to find out. I was very wary of assuring them that he would qualify. My broker agreed that it could be very dicey and that there's no way to really know until they file their paperwork with the IRS. Several people in my office tried the same approach (calling the IRS) and none got straight answers.
0 votes
Rain Wallace…, , Salt Lake City, UT
Fri May 7, 2010
I called the IRS help line and after an hour on hold, someone picked up and told me that they only meant "construction" contracts. I read from the IRS website word for word what the rules stated and he still told me only new construction contracts. (Did I mention I was on hold for an hour?), so I called an accounting office and was told they would file for the tax credit if there's a buyer and seller signatures on a purchase contract. Thank you for your answers, I didn't want another hour on hold and Dan, Deborah and Steve came very close to the accountants answer. I'll be interested to see if they allow me to get a check or not. Lauen thank you for the other thoughts about the credit. If I have a problem with this, I'll let it be known on Trulia. Thanks again.
0 votes
Debbi Love, Agent, Midvale, UT
Thu May 6, 2010
Lauren,
Buyer and seller can cancel the contract at any time during a regular contract as well...it's called a contingency. So is the 3rd party approval. As far as the tax credit is concerned, I Still think it is more important that it closes before June 30th. If the conditions are met, then it Was a binding contract because it closed, If it doesn't close, it doesn't matter. You can't claim it unless you buy a house...it's that simple.
0 votes
Lauren Dahl, , Salt Lake City, UT
Thu May 6, 2010
I disagree with the two above answers. I talked to my broker at length about this issue, and she said that in Utah the contract is not binding until the third party has approved it. So, it is different than a regular contingency in that way since either buyer or seller can cancel at any time until third-party approval. You have to have a binding contract by April 30 and closing before the end of June. An unapproved offer is not a binding contract.
0 votes
Debbi Love, Agent, Midvale, UT
Thu May 6, 2010
Hi Rain,
The determining factor as I understand it is that it must close by the 30th of June. What a short sale actually is is a real estate transaction between a buyer and seller with a Contingency of the approval by the bank. So, as long as it was under contract between the buyer and seller by April 30th and closed by June 30th, it should qualify for the tax credit. That's the way I see it.
0 votes
Daniel Walker, Agent, Salt Lake City, UT
Thu May 6, 2010
Subject to bank approval or third party approval is simply another contingency in the contract, just like the due diligence condition or appraisal and/or financing condition. The contract is between buyer and seller. The bank is not a party in the contract. As long as you were under contract with the seller in the first or primary position before the end of the day April 30, 2010, you should qualify for the tax credit. Assuming you have a valid, enforceable real estate purchase contract.

Dan Walker
Walker Realty
http://www.AtHomeUtah.com
http://www.TheRealEstateReportCard.com
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