Escrow and the Closing
Responsibilities of the transaction/escrow agent
In Mississippi, it is the closing attorney.
The escrow agent is responsible for overseeing and coordinating the closing activities, acting as a neutral third party between the buyers and sellers. The escrow agent may be an attorney, a title company, a trust company, an escrow company, or the escrow department of a lending institution. Your escrow officer must follow both parties’ instructions (buyers and sellers) involved in the transaction.
They are a neutral third party. Also, called the Transactional Agent.
The job of the Transactional Agent
An escrow is a method of closing a real estate transaction.
A closing in which the funds, title, releases, recordings are placed into escrow for processing by the escrow agent, with the actual title transfer taking place after all these items are completely processed.
All Things Taxes
TRANSFER TAX STAMPS
Deed transfer taxes are separate from property taxes. Typically, local counties collect it at the time of deed filing and affix a “stamp” to the deed, rendering it valid. The county then delivers collected funds to the state, which disperses the monies to support state, county, and municipality operations.
A tax charged by the state to transfer an interest in real estate helps establish an accurate value for tax assessment purposes.
Ad Volerum / Property Tax
According to Value. This is your yearly property taxes.
A special assessment is a term used to designate a unique charge that government can assess against real estate parcels for certain public projects. This charge is levied in a specific geographic area known as a special assessment district (SAD).
Interest paid on a 1st mortgage is 100% deductible on income tax.
Saving the best taxes for later. 😊
An official (or sometimes the treasurer in small counties) determines the assessed valuation of real property.
Board of Equalization
When meeting to review the assessment of all taxable property, the commissioners hear appeals from protests filed with the assessor.
The state board of equalization meets each year to determine if each county has assessed the percentage of actual value prescribed by law.
A county official who collects the taxes and determines the budget for schools, road maintenance, etc.
Commercial Assessed Valuation
A percentage of actual value for non-residential property used to compute property tax.
WHEN TITLE PASSES
Ownership passes when the buyer accepts the delivered and signed deed.
Prorartions – Who pays what?
The fair-share buyer-seller splitting of expenses that extend over closing.
Two types of payments and costs that are allocated between the buyer and seller at closing are accrued items and prepaid items:
- An accrued expense is an accounting expense recognized in the books before it is paid for.
- A prepaid item is an accounting expense recognized in the books after it is paid for.
is an amount owed to the buyer or seller or something for which they’ve already paid.
is something that the buyer or seller owes.
credit to the seller – OK. We paid it off!
debit to the buyer – The buyer has to pay for the house.
a credit to the buyer
Before the closing date, paying the tax on the property is the seller’s responsibility; on and after the closing date, it’s the buyer’s responsibility as the new owner. Because state and local property tax requirements vary across the United States, including the tax due dates,
The seller pays taxes up to the closing date.
If the Seller Paid Taxes Already:
It is a credit for the seller.
They get a refund.
They only pay for the days they owned the property.
The buyer pays taxes from the day after closing until the rest of the year.
It is a debit for the buyer
They only pay for the days they owned the property.
Importance of recording
Entering documents into the public record. Any written document that affects any state, right, title, or interest in land must be recorded in the county where the land is located to serve as constructive notice.
Constructive Notice to the World
That legal notice presumed by entering a document into the public record, meaning any interested person (e.g., buyer) could have investigated the record or the property. Possession of the property is also considered to be constructive notice.
A term referring to the fact that the date and time of recording determine the priority of recorded documents, liens, etc. Comes from a “race” to the courthouse.
The first person who records the deed owns the property.
RESPA – Real Estate Settlement Procedures Act
The Real Estate Settlement Procedures Act (RESPA) provides consumers with improved disclosures of settlement costs and to reduce the costs of closing by the elimination of referral fees and kickbacks.
RESPA prohibits kickbacks or undisclosed fees usually secretly paid for referring business to someone.
TILA Respa Integrated Disclosures
Sections 1098 and 1100A of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) direct us to publish rules and forms that combine certain disclosures that consumers receive in connection with applying for and closing on a mortgage loan under the Truth in Lending Act (Regulation Z) and the Real Estate Settlement Procedures Act (Regulation X).
This new rule primarily does two things:
It simplifies and consolidates some of the required loan disclosures, and
It changes the timing of some activities in the mortgage process.
Delivery of Loan Estimate
Estimated costs: The lender must give the borrower a loan estimate of all costs associated with the mortgage loan no more than three days after receiving the application.
Amended Loan Estimate
What is a Closing Disclosure?
A Closing Disclosure is a five-page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage (closing costs).
The lender is required to give you the Closing Disclosure at least three business days before you close on the mortgage loan. This three-day window allows you time to compare your final terms and costs to those estimated in the Loan Estimate that you previously received from the lender. The three days also gives you time to ask your lender any questions before you go to the closing table.
Basis of a Property
The original cost of a property.
Any legal tax advantage that defers or eliminates tax liability, such as property tax and mortgage interest deductibility, depreciation, etc
The difference between the adjusted basis of property and selling price
Capital Gains Exclusion
The Taxpayer Relief Act of 1997
They were passed by Congress to greatly reduce the tax on the gain to be realized on the sale of real estate, especially for residential real estate. With the passage of the Act, individuals can exclude up to $250,000 of capital gains from taxation, while married couples can exclude up to $500,000. (personal residence)
Capital gains are profits that an individual receives from an appreciation in the value of an investment.
Basic Example (Does not include the cost of repairs or other fees.)
George purchased his home and primary residence for $150,000. The home was in very extreme disrepair.
George did extensive repairs and upgrades during the time he lived there. George sold his property 2 years later.
George sold the home for $400,000.
He has a profit on his primary residence of $250,000.
The capital gains exclusion erases taxes on that profit.
George’s selling price
George’s buying price
Insert Your Photo Here to be a George ↓
Nursing Home Exception: While you usually are required to own and live in the house for two of the last five years, people who end up living in a nursing home can have this requirement lessened to only one out of five years. Also, the nursing home’s time counts towards the use test as if it were the original home.
Home Office Exception: Be aware that if you take depreciation deductions for a home office, that amount will be subtracted from your capital gains exclusion. For example, if you were typically entitled to $250,000 but had taken $50,000 in depreciation deductions for a home office, you would only be entitled to a $200,000 exclusion from your capital gains.
Capital gains exclusion- single at 250,000 and married 500,000.
Capital Gains-Exclusion Used for your personal residence. You must have lived there for at least two years out of the last five.
Capital Gains are computed on the difference between the net adjusted basis (cost) and the selling price.
1031 Tax Deferred Exchange
1031 Tax Deferred Exchange
Thanks to I.R.C. Section 1031, a properly structured 1031 exchange allows an investor to sell a property, reinvest the proceeds in a new property, and defer all capital gain taxes. IRC Section 1031 (a)(1) states:
“No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or investment if such real property is exchanged solely for real property of like-kind which is to be held either for productive use in a trade or business or investment.”
Exchange of like-kind property under I.R.S. Code 1031, in which parties may defer any capital gains tax due.
BASIC 1031 exchange terminology:
A maximum of 45 calendar days from the relinquished property closing to correctly identify potential replacement property or properties.
Maximum of 180 calendar days after the relinquished property closing.
BOOT: “Non-like-kind” property received; “Boot” is taxable to the extent there is a capital gain.
CASH BOOT: Any proceeds actually or constructively received by the taxpayer.
LIKE-KIND PROPERTY: Any real property held for productive use in a trade or business or held for investment; both the relinquished and replacement properties must be considered like-kind to qualify for tax deferral.
The entity which facilitates the exchange; defined as follows:
(1) Not a related party (i.e., agent, attorney, broker, etc.)
(2) Receives a fee
(3) Receives the relinquished property from the taxpayer and sells to the buyer
(4) Purchases the replacement property from the seller and transfers it to the taxpayer
(5) Is a qualified intermediary
RELINQUISHED PROPERTY: Property given up by the taxpayer, referred to as the sale, exchange, down leg, or Phase I property.
REPLACEMENT PROPERTY: Property received by the taxpayer, also referred to as the purchase, target, up leg, or Phase II property.
A Real Life 1031
Last But Awesome
Depreciation – Straight-Line Method
Determines the equal annual depreciation allowed in a straight line from the adjusted basis to zero and computed by dividing the adjusted basis by the estimated years remaining of economic life.
Recovery of an investor’s property cost down to zero over 27.5 years (residential) or 39 years (non-residential). Divide the value of an income property by 27.5 (or 39), then deduct that amount on income tax each year.
Depreciation also reduces the adjusted basis of the building.