Monday, September 13, 2004

Capital Gains Exceptions Finalized

The Internal Revenue Service issued final rules recently that could reduce capital gains taxes for some homeowners. Current rules allow taxpayers to exclude $250,000 in gains for single sellers and $500,000 for married sellers if they have met certain criteria.

Ann vom Eigen, Legislative and Regulatory Counsel for the American Land and Title Association, reports on her group's website, "The IRS has finalized rules for the treatment of taxpayers who do not qualify for the maximum exclusion of capital gains on home sales because they have not owned and used their property as their principal residence for two of the past five years, or have taken an exclusion within the preceding two years. The rules significantly expand the situations under which capital gains exclusions may be taken."

In essence, if a homeowner found it necessary to move before the two year period, then he or she would owe capital gains taxes on gain under the two floor amounts ($250,000/$500,000).

There have always been exemptions under the code to allow for at least some exemption from taxation if the homeowner had extenuating circumstances, such as a change in place of employment, health or unforeseen circumstances. Under the final rules, "safe harbors" are established for taxpayers to qualify for these exclusions of capital gains taxes.

Unforeseen circumstances have been the most confusing section of the rules, though they point out that the IRS is not heartless when it comes to taxes and hard times. What determined unforeseen circumstances seemed to be considered on a case-by-case basis in the past. Now, the IRS has named an unforeseen circumstance as "an event that the taxpayer could not reasonably have anticipated." In addition, the unforeseen circumstance could affect someone in the household other than the taxpayer, such as the taxpayer's spouse or other dependent who lives in the house.

Safe harbors under the unforeseen section include, but are not limited to:

A natural or man-made disaster or act of war or terrorism resulting in a casualty to the residence.


The cessation of employment as a result of which the individual is eligible for unemployment compensation.

A change in employment or self-employment status that results in the taxpayer's inability to pay housing costs and reasonable basic living expenses for the taxpayer's household.

Divorce or legal separation under a decree of divorce or separate maintenance; and

Multiple births resulting from the same pregnancy.
If you find yourself in an "unforeseen circumstance" situation, then you may be in luck, as it were, for your hardship. It means you may be able to pay less taxes or be exempt from taxes altogether. The tax would be calculated based on how long you had lived in the property, among other criteria. Check with your accountant to be sure and you can use the online capital gains calculators below to get started.

Members of the military also receive some final rules on the length of stay test. ATLA also reported that under the military exception, "A taxpayer serving, (or whose spouse is serving) on qualified official extended duty as a member of the uniformed services or Foreign Service may elect to suspend the running of the 5 year period for up to 10 years. The exception for members of the Foreign Service and the military is retroactive to May 7, 1997."

Monday, September 06, 2004

Good and Bad of Multiple Offers

A reader recently wrote, complaining that she felt there were no “rules” in the arena of entertaining multiple offers in a real estate transaction. What I have found in many instances, is that what is legal and acceptable practice isn’t what many buyers want to hear.

“You should have told me you had multiple offers…that’s not fair,” is usually the first complaint filed from the party who loses out on a contract. Then they go looking for someone to file a complaint against or to try to sue. (We are, unfortunately, the most litigious country on the globe.)

On the other hand, I’ve heard some buyers complain that they believe the listing agent is lying and only trying to push up their offer when they are told there are multiple offers – then they demand to see the other offer. They assume that the seller is simply trying to push up the price by claiming there are other offers when none actually exist.

Revealing the status of multiple offers is up to the seller. The cold hard facts are that the buyer has to sit and wait for a response from the seller (depending on whether or not he wrote in a deadline for responding). Nevertheless, the buyer has no “rights” to know if there are more offers.

The National Association of Realtors’ Code of Ethics has several Standards of Practice (SOP) in dealing with multiple offers. First of all – a Realtor “shall submit offers and counter-offers objectively and as quickly as possible.”

In fact, all offers must be submitted until the seller has made a final decision. “When acting as listing brokers, REALTORS shall continue to submit to the seller/landlord all offers and counter-offers until closing or execution of a lease unless the seller/landlord has waived this obligation in writing. REALTORS shall not be obligated to continue to market the property after an offer has been accepted by the seller/landlord...”

As far as telling buyers about multiple offers, this situation apparently became so prevalent, that about a year ago the NAR instituted the following instructions in its SOP: “REALTORS, in response to inquiries from buyers or cooperating brokers shall, with the sellers’ approval, divulge the existence of offers on the property.”

The key wording in this phrase is “in response to inquiries.” It’s a kind of “don’t ask, don’t tell” situation for the listing agent. She’s not going to tell the buyer about multiple offers if the buyer doesn’t ask – however, reading the SOP further, you can see that the Realtor is not obligated to divulge the presence of multiple offers, either, without the sellers’ approval.

In a sellers market, some agents will place a deadline on when all offers must be submitted. Once the offers are submitted, the agent then settles down with the seller for a marathon contract review. The real area of contention comes when offers float in one after the other over a few days. Thus, the usual practice of dealing with multiple offers would go something like this:

Each offer is presented to the seller for consideration.
The seller will hear all offers before making a decision.
A seller can accept or begin countering more than one offer at a time, however, s/he must set an order of precedence, i.e., primary offer, first backup contract, second backup contract, etc.
Be sure to get released from an offer before finalizing the selected offer, i.e., don’t sell the house twice.

Multiple offers can be a good thing. In a fast-paced market, they are considered the norm and the presence of such inflates pricing. The buyer who works with an agent who understands the aggressive techniques needed to escalate their offer, will win. However, you can also have buyers pull contracts during multiple offer situations because they want to deal in a less competitive environment.

It’s interesting to hear from buyers who are outbid in the selling process and start talking about “fairness” in a bidding war. There’s this idea that just like kids lining up for a drink at the lemonade stand, that if they get there first, they get to drink the freshly made beverage at the price posted without any interference from the kid in the back of the line.

In real estate, the seller doesn’t care when you got there – he or she is looking at basically one thing – what’s the net dollar amount to the seller.