WHAT IS A "BINDING" CONTRACT OF SALE FOR IRS TAX CREDIT PURPOSES?? "Let's all be careful out there.."

By
Real Estate Agent with Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate 303829;0225082372

WHAT IS A "BINDING" CONTRACT OF SALE FOR IRS TAX CREDIT PURPOSES??

Depends on whether you are a

  • HOME BUYER
  • HOME SELLER
  • REAL ESTATE LICENSEE
  • IRS TAX FORM REVIEWER
  • LEGISLATIVE BILL WRITER
  • OTHER

Sadly, this is a perfect example of the fact that the brains who dreamed up the income tax credit do not have the foggiest idea about how their programs effect the tax payers, or should I use the term the IRS uses, "Worker".  You gotta love that.  SEE:

The Worker, Homeownership, and Business Assistance Act of 2009

WHY IS THIS SO IMPORTANT?  Because the determination of what constitutes a BINDING contract may cause the denial of the tax credit to MILLIONS of tax return filers who believe that they qualify, plan to use the funds and, generally, realy on the advice OF REAL ESTATE AGENTS in matters of real estate.

HAVE YOU BEEN ASKED FOR ADVICE ABOUT THE CREDIT???  I surely have. 

Lola Audu  has published a post examining this matter, however, as with any real estate practitioner, has serious questions about the meaning of the IRS guidelines.  As for Jim Hale's thoughtful comment, I could easily read the IRS instructions that way.  However, without APPROVAL by the seller's lender, there is no "binding" agreement.  What "binds" a Contract of Sale?? 

For one thing, satisfaction of all contingencies.  When is the "lender approval" contingency of the Contract of Sale for a short sale satisfied??  When you get the approval letter FROM THE SELLER'S LENDER.

Sadly, those conditions do not include satisfaction of that critical contingency, approval of the Contract of Sale by the Seller's lender.  Without which, there has not been, is not and never will be a BINDING Contract.

What is going to happen when thousands of home buyers file for the tax credit and the IRS denies their application because, without satisfaction of that contingency by April 30, there is no BINDING Contract of Sale.

The key word is, of course, BINDING.

I'm willing to accept that, for purposes of the Tax Credit, the BINDING condition for claiming the tax credit is the date of acceptance between the parties, the BUYER and the SELLER.

However, I am not going to STAKE MYSELF OUT AND GIVE THAT ADVICE TO A CONSUMER.  I'm going to refer inquiries to the IRS web site and let the consumer come to their own conclusions or the advice of their tax consultant.

Courtesy, Lenn Harley, Broker, Homefinders.com, 800-711-7988.

                           TAX CREDIT

"Honey, were you able to find out if our contract will qualify for the tax credit?"

"Not yet Dear.  I asked 4 people and got 4 answers."

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Re-Blogged 6 times:

Re-Blogged By Re-Blogged At
  1. Margo Otey 04/13/2010 12:14 AM
  2. Joe Pryor 04/13/2010 01:50 AM
  3. Leslie Ebersole 04/13/2010 02:22 AM
  4. Leeza Morris, 04/13/2010 02:47 AM
  5. Renée Burrows 04/13/2010 03:22 PM
  6. Mario Villagran 04/22/2010 08:05 AM
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Rainer
21,867
Jeff Rainwater
John L. Scott MPV - Maple Valley, WA

I have to say I disagree with Leslie's comment of...

"A contract is binding when fully accepted by all parties and all contingencies have been resolved."

If this were true, then nobody could be held to the contract if not all contingencies were resolved. So if I write in that my buyer must apply for financing within 5 days of MA, this logic would mean they could completely disreguard that timeline with no consequences if their title contingency has not been resolved, for instance. That's certainly not the case. They are still under binding contract to do what they agreed to do.

Having all contingencies resolved just means there is nothing left that the transaction is contingent upon. Contingencies do not have to be resolved to make a contract binding. Contingencies are PART of the binding contract. Both parties are still bound by the terms within.

I think this thought process probably comes from years of agents telling their buyers they are not bound to anything until after the contingencies are all past. I suggest simply changing the language used there to say they are still bound to hold up their part of the contract, but that nothing is set in stone and they can still get out of the contract by responding to one of the contingencies.

I think in practice we probably all understand how it works, but in terminology, we may interpret the words differently.

Apr 13, 2010 02:44 PM #77
Rainer
5,327
Mary Krummenacher
RE/MAX Properties West - Saint Louis, MO

Great info Lenn as always.

Apr 13, 2010 02:47 PM #78
Ambassador
889,412
Lane Bailey
Century 21 Results Realty - Suwanee, GA
Realtor & Car Guy

I think it is going to have to get interpreted...  If that contingency denies the credit, then what about a Due Diligence Period?  The buyer can cancel the contract... what if that extends past April 30th... or a Financing Contingency?  Or any other contingency that allows the buyer or seller to get out of the contract?

What I CAN agree with is that buyers need to consult THEIR resources for answers... we aren't tax professionals (at least most of us aren't).

Apr 13, 2010 03:05 PM #79
Ambassador
1,499,441
Renée Burrows
Savvy Home Strategies Realty, LLC-REALTOR®-Estate-Probate - Las Vegas, NV
Las Vegas Real Estate Broker - www.urLVhome.com

very compelling post and I must say that the debate from the comments is amazing.  Never thought of it this way!

Apr 13, 2010 03:21 PM #80
Rainmaker
1,313,225
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

Looks like both a legal question and an IRS question.  In NH the form contract defines what is a "binding contract"... however, one would wonder if the IRS has a different opinion.  As many point out, best to refer the client to an attorney, accountant and the IRS.   

 

 Next question to be answered is what constitutes a "CLOSING"?  Different states may interpret that differently too!  Does the deed actually be of record to fully comply with the tax credit regs. 

Apr 13, 2010 03:35 PM #81
Rainmaker
1,074,521
Sharon Alters
Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
Realtor - Homes for Sale Fleming Island FL

Lenn, like I said on Lola's post - and you agree with the definition of binding, but the IRS can definitely spin it if they want to. But like Aaron said, if there is escrow and it's not binding, then why can't the buyer just demand their money back anytime they want? Because it's binding...but I'm not a lawyer nor a CPA, and I have not given advice on this topic. I would also refer them to the 'experts' for this and let them handle the hot potato!

Apr 13, 2010 03:57 PM #82
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Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

Lenn - I think this makes a lot of sense.  The IRS is going to come to its own conclusions and the IRS and/or tax professionals need to be advising the client.

Apr 13, 2010 04:50 PM #83
Rainmaker
596,712
Jim Hale
ACTIONAGENTS.NET - Eugene, OR
Eugene Oregon's Best Home Search Website

Lenn -

Okay, you got me.  I'm not a tax professional.  And I'm not currently playing one on TV.

But I have been a tax consultant in the past.  And I can read the IRS website.

I'm not buying a house this year.  But I have helped several clients claim this credit....without compensation and certainly with a disclaimer.  It may possibly be one of the easiest things having to do with tax returns in many years.

 

If I were claiming either of the the tax credits this year, I'd plan on getting my sales agreement signed on both sides (and acknowledged where required) prior to the end of the April.

Then, regardless of the type of sale, I'd make darn sure it closed (i.e. recorded) prior to the end of June.

Then I'd plan on attaching the following to my Form 5405 (for the tax credit) and my Form 1040X (Amending my 2009 return) (or my 2010 income tax return when filed) in compliance with the IRS instructions for the credits:

* A copy of the (first and last?) pages of my sale agreement (showing parties, dates and signatures...including the acceptance and acknowledgment) showing the agreement was made prior to the first deadline..

* A copy of the HUD-1 showing the transaction closed prior to the second deadline.

That is all the IRS is asking for.  That's all I would send them.

I would not send them a short sale lenders approval.  (Any more than I'd send them the new loan lender's approval.)

I would not send them a repair addendum, a sellers disclosure or anything like unto them.

I'd figure, if the IRS wanted to see them, they would have asked for them.  They haven't.

 

Apr 13, 2010 05:01 PM #84
Rainmaker
596,712
Jim Hale
ACTIONAGENTS.NET - Eugene, OR
Eugene Oregon's Best Home Search Website

 

Let's give Congress a little credit....for these credits. 

After all, they're not the brain-child of someone who "knows nothing of our industry".  The author is Sen. Johnny Isakson (R-GA) a former multi-office real estate broker. 

In November, Congress wrote this extension/expansion bill the way they did (with two deadlines instead of one) precisely in order to (1) give a deadline for the execution of the agreement and (2) give the 11th hour transactions plenty of time to close without new lenders, escrow companies, and county recorders going nuts in the last few weeks and days.

They had heard about the jam-up the fast-approaching November 30 deadline was creating.  They did not want a repeat performance.

They were not trying to make this harder.  They were trying to make it easier.

The IRS has been trying to do the same (even as they are trying to stamp out fraud.

For those who are willing to read plain English:   They  have all succeeded. 

 

I don't think an agent should give a lot of advice about this subject.

But an agent had better find out how this works and make sure s/he executes REALTOR tasks in a timely manner so that a client isn't hanging out there not having met the deadlines.

That's where an agent's concern needs to be focused.  That's where you can't blame your non-compliance on some professional with another kind of license. 

Apr 13, 2010 05:02 PM #85
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Debe Maxwell, CRS
www.AtHomesCharlotte.com | The Maxwell House Group | RE/MAX Executive | (704) 491-3310 - Charlotte, NC
Charlotte Homes for Sale - Charlotte Neighborhoods

Hi Lenn!  I'm with Bill G. on this one--"Under Contract" means just that--whether or not it had conditions or contingencies to be removed/resolved during the term of the Contract.  However, I'm not a CPA and advise clients to confirm with a CPA prior to making a decision based upon my interpretation.

This does seem to be the big debate during these last few weeks of the tax credit offerring.  For the CPAs to whom I am referring my clients for advice, I apologize for adding more to their plates during this, their busiest month of the year!  They could have selected a better "deadline" month, that's for sure--at least for the CPAs!

 

Apr 13, 2010 05:29 PM #86
Ambassador
2,698,145
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Cameron.  I'm saddened to send anyone to the IRS web site because, if it didn't answer the question for me, it won't answer it for the consumer.  It just relieves me of the liability of giving the advice.

Chris.  Of course.  However, few will follow that advice.  They'll go to TurboTax.

Erica.  Not I.  Not I.  Unless I have a lapse of caution.

Lora.  What else can we do?

Jeff.  I agree with your analysis.  For instance, I never, never, never advise a buyer to remove the financing contingency.  Listing agents insist to no avail that we do do but I know that the buyer's EM is at risk for many unknown events without the protection of a financing contingency. 

I do consider the contingency of the lender's approval letter more "material" than most routine contingencies simply because the buyer and seller have little to no control over the outcome and I don't trust the sellers' lenders to act with any rationality. 

Mary.  Thanks.

Lane.  We are surely NOT tax pros.  I don't believe it's going to be interpreted.  Fact is, if the seller's lender denies the approval, it's all over.  The question is, if the seller's lender approves the sale after the April 30 date, does that affect the tax credit.  There are opinions all over the place. 

Renee.  Thinking can often be dangerous.

Joan.  The first question has no clear answer.  However, as to what is a closing????  My recollection is that a deed does NOT have to be recorded to be a legal transfer.  Once the buyer tenders the money and the seller signs the deed, the "deed is done".  Recording is perfunctory and probably for the tax man. 

Frank and Sharon.  Which expert????  Surely not a real estate agent.  Of course, we can synopsize the contract for our buyers and sellers, but we can't give tax advice and this question surely rises to the level of tax advice. 

Christine.  Indeed.  I simply want agents to know that if the question comes up from a buyer, they should NOT opine.

Jim.  I believe you win the contest of what to do and why. 

1.  Give the IRS what they requested.

2.  Don't give them any more than they requested.

All that said, the question would have been moot if Sen. Isakson had simply required that the IRS include the matter of Short Sales in the instructions.  The fact that the IRS is silent in the matter of Short Sales is what is causing the question in the first place. 

No offense to Sen. Isakson, but has he practiced real estate brokerage in the uncertain world of Short Sales.  Sen. Isakson has been in Congress since 1999, long before the Short Sale debacle.

Debe.  They could have picked a better month for the consumer and the IRS too.

Apr 13, 2010 10:27 PM #87
Ambassador
917,598
Missy Caulk
Missy Caulk TEAM - Ann Arbor, MI
Savvy Realtor - Ann Arbor Real Estate

One of our agents at KW beat me too it.

Hi Everyone - I talked to Bernie at MAR legal hotline.  As per Bernie, if you enter into a contract prior to April 30th with the buyer and seller, even without bank approval and you close prior to June 30th, your client can get the tax credit.  Just fyi.....

Hope he is correct as this is what I have been telling people.

MAR  Michigan Associaton of Realtors.

Apr 14, 2010 12:35 AM #88
Rainer
7,481
Randy Smith
Equity Real Estate - American Fork Utah - Provo, UT
e-PRO, CLHMS - UtahHomeSearch.com

Lenn,

 

Thank you for your warm welcome to ActiveRain! Just one question:  How do you keep up with it all?  Wow!  I appreciate the conversation on this topic and think that Jim Hale nailed it.

Apr 14, 2010 12:58 AM #89
Rainmaker
291,823
Darrell Walters
W. Darrell Walters - Newnan, GA

Missy, that is exactly the same thing that I have heard from several short sale agents that I have worked with. Hopefully that is what the IRS says about the matter as well because it is their opinion that really matters the most.

Apr 14, 2010 01:12 AM #90
Rainmaker
587,865
Susan Neal
RE/MAX Gold, Fair Oaks - Fair Oaks, CA
Fair Oaks CA & Sacramento Area Real Estate Broker

Hi Lenn, You are wise not to try to interpret ambiguous legal language to your clients.  I'm not sure how the normal contract contingencies might nix the credit and I won't try to figure that one out, but I have been disturbed by some advice I heard another couple of agents give to short sale buyers.  They say that an escrow should be open with a long escrow period the minute an offer is accepted by the seller and submitted to the lender, so that as long as the approval comes before the end of June they would still qualify.  I think this is REALLY dangerous advice.

Apr 14, 2010 08:22 AM #91
Ambassador
2,698,145
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Susan.  The dates are safe enough if under contract by April 30, EXCEPT that the average closing tome for Short Sales is about 120 days.  GEEZ.

#90.  We can only work with what we have.

Randy.  Actually, there are five of me. 

Missy.  That is the operative procedure.  My fingers are still crossed.

Apr 14, 2010 11:28 AM #92
Rainmaker
273,173
Wayne B. Pruner
Oregon First - Tigard, OR
Tigard Oregon Homes for Sale, Realtor, GRI

Thought provoking post. Let's hope this does not turn into a mess and it is implemented in the spirit that was intended.

Apr 14, 2010 05:06 PM #93
Ambassador
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Wayne.  If you have figured out just what that spirit was, let us know. 

I have pondered the motivation of the administration for this transfer of wealth to SOME home buyers from the remaining tax paying citizens and have determined that it was for the purpose of getting votes. 

What say you?????

Apr 14, 2010 09:59 PM #94
Rainmaker
89,832
Dana Voelzke
loanDepot (203) 733-9408 - Bethel, CT
Loan Officer/ First time home buyer specialist

I have had this question 4 times in the past two days. I asked the buyers agents to check with their CPAs and attorneys as others here. I agree that it's vague. Thanks for the post.

Apr 15, 2010 05:53 PM #95
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Dana.  Thanks for commenting.  Smart move.  We aren't tax advisors.

 

Apr 15, 2010 10:23 PM #96
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