Trying to Understand Act 185 Tax Adjustment Program as it affects the sale of property

 1) The Act 185 Tax Adjustment Program  (formerly know as the Property Tax Prebate) is an Income Tax benefit based on the Sellers previous years Income Tax Filing.  If the Seller qualifies for this Prebate then the Seller (not the Buyer) should ultimately be the beneficiary. 

2). Recent legislation has declared that any Prebate money the Tax Payer (seller) is entitled to is sent to the Town (not returned to the Tax Payer/Seller) and applied as a credit to the next year's property taxes.  The tax adjustment is intended to benefit that tax payer without actually returning money directly to them  -  if the property has been sold in the interim that money ends up going as credit to the new owners property taxes and does not go to the benefit of the entitled Tax Payer/Seller so logically there should be an exchange from Buyer to Seller to ensure that the correct taxpayer gets the benefit of the tax rebate.

3).   In general there is a processing time delay between the normal tax filing deadline (April 15) and the date the confirmed amount of any Tax Payer's entitlement is actually processed and sent to the towns (generally July 1).   f Sellers file income taxes late, after April 15, by Extension this delay in verifying the amount of the credit can be extended to as late as Sept 15.

4)  If closing occurs after the State sends the Prebate Money to the Town ( generally after July 1) everyone knows exactly how much of the Seller's money goes to the Buyers next property tax bill so it can easily be identified and adjusted for at closing so there is no need for an escrow .  The amount of the proration will be a closing cost to the Buyer.

 BUT:

5)  If the closing occurs within that processing time frame after April 1 (for the seller to be qualified as resident) and before the Prebate money actually gets to the Town and can be verified (generally July 1) the amount that should rightfully be returned to the Seller can only be Estimated.     (Attorneys and Accountants have those forms and can make estimates along with other prorations based on adjusted gross income information provided by the sellers.)  The Seller and Buyer can agree to simply trust each other to make an adjustment later but in order to be reasonably sure that the money intended to benefit the Seller will be available once the actual Prebate amount is verified by the Town it may be considered appropriate to place an estimated amount in an escrow account at time of closing from the Buyer.   When the Tax Adjustment is credited to lower the new owners property tax bill a matching amount is released from the escrow to pay back the Sellers.  Any remaining funds in the escrow are returned to the Buyer.

If you have any questions or concerns regarding this topic please consult your attorney and/or tax consultant.

Activity so far in Q1 2007 has been pretty spectacular. Properties that are showing value or that are located in prime locations are attractive immediate and sometimes multiple offers. The Norwich, VT market, after experiencing a pretty significant correction in 2006, has shown strong signs of becoming a more normalized and balanced market. Hanover, NH prices, having remained solid throughout 2006, continue to show strength and properties priced to market levels curry interest and bids quickly. We did see a small drop in activity in the first and middle part of February after a flurry of contracts and deposits in January and the earlier part of the month but that drop was largely attributable to weather (extremely unseasonably cold and miserable along with a few major snowfalls).

Overall, the outlook for 2007 seems very positive.

In the news recently and again today was more concern over the "wild west" nature of the sub prime lending market over the last five years. Mortgage lates are on the rise, foreclosures seem to be popping up here and there and the concern is that the market for home buyers with poor and damaged credit that has helped to fuel the housing market are now frozen out of the market. Of the top 25 sub prime lenders over the last five years, only a handful are still around.

The implosion of this sector of the credit markets is undoubtedly troublesome and could spell catastrophe for the lower price ranges in our marketplace. Rising inventories driven by owners that were stretched beyond their borrowing capacities by less than reputable mortgage brokers shilling poisonous credit products could result in more short sales and foreclosures.

A bright spot on this othewise dark subject are the community lending and reinvestment based products underwritten by new FHA guidelines. Anecdotal evidence as to how these products are helping abounds. I recently heard a story from the top lender in our area about a first time buyer looking to get into a home priced at $129K. In the subprime pool (550 credit) she was being quoted a first mortgage at 9.99% and a second to make up the balance of the purchase (she had about $2500 to her name at the time) at almost 13%. Working through community based FHA lending she was able to secure a 30 year fixed at just under 7%- a product that most likely saved her from financial ruin as the carrying costs of the debt quoted in the sub prime pool would have certainly buried her over time.