Every intentional human behaviour has one or more payoffs. Sometimes they are rewards we’re consciously aware of, like getting our literal paychecks in exchange for the sweat of our brows. Other times, we are much less conscious of the potential payoffs of our behaviour, as when someone procrastinates at filing their taxes to avoid the realities of their financial situation (for a while – the tax man always cometh, sooner or later).
Psychologists call these less-obvious payoffs “secondary gains.” According to them, a payoff is a payoff, whether or not you know you’re getting it!
When it comes to putting a firm, year-end deadline on your personal mission to buy or sell your home, there are the obvious payoffs of having 2013 dawn on your new life in your new home, being out from under water or simply being able to move onto a new phase of your life. But there are loads of secondary gains, as well.
Here is a handful of payoffs, some obvious, some less, which you stand to realise by getting your home purchase or sale closed before the curtain drops on 2012 – and the ball drops on 2013:
1. Guaranteeing that you benefit from the Mortgage Debt Relief Forgiveness Act. This law exempts current homeowners from the hidden, serious income taxes that are normally incurred when mortgage debt is forgiven – including in cases where an underwater home is sold short. See, a mortgage lender extends cash to a borrower when they make a mortgage on a home. If that debt is wiped out without actually being paid back, then the cash that was extended to that borrower is normally considered income by the IRS, and is taxed as such.
But when the real estate market crashed, the federal government enacted this Act to eliminate the thousands and thousands of dollars of income taxes the average American who loses a home to foreclosure or short sale would otherwise incur. It’s sort of the government’s effort not to kick folks while they are down, and help them recover, financially, from these already traumatic events.
Thing is, this Act is set to expire on December 31, 2012. Most industry insiders expect it will be extended before that time, but growing numbers are surprised it hasn’t already been. And with the election set to take place shortly before the expiration timeline, there is an increasing concern that the Act could end up falling through the cracks.
If you need to sell an underwater home via a short sale, the time to list it was really a few months ago. But some servicers are expediting these transactions so that it might still be possible to get your short sale closed before year’s end. If the stars align and your escrow closes by December 31st, you’ll avoid the enormous tax burden that could result if the Act expires and you had to do a short sale in the future. (Note: there are several other, non-expiring exemptions from this mortgage debt tax – if you’re considering a short sale, talk with your tax advisor to see whether this urgent year-end deadline applies to you.)
And if you’re buying in a market where many homes are still underwater, you might stand to benefit from the inventory changes that may result when sellers who’ve been trying to hold onto great – but upside-down – homes put them on the market in an effort to take advantage of the Act.
2. Reduced competition. Conventional real estate wisdom pegs the summer months as the hottest months of the year, for several reasons:
- families with children prefer to move into their new homes before the kids go back to school
- in areas where the fall and winter months bring bad weather, it’s less likely to see house hunters out and hunting – and less desirable for sellers to have folks traipsing rain and snow into their homes
- and the holiday seasons tend to be busy with travel, family dinners and other home-oriented activities – which makes both buyers and sellers simply less likely to be active in the market, statistically speaking.
What this means is that if you do happen to be kicking your house hunt into high gear right now, you’re likely to face fewer competitors, and that means a lower incidence of multiple offers and lower likelihood of being outbid, if you live in a market where that has been taking place.
The converse is true for sellers: many banks are holding back on releasing REO inventory these days, and even some “regular” sellers will hold off from listing during the holidays, waiting until after New Year’s. This may position you to have less competition from other sellers for the qualified buyers who, like you, are trying to close escrow before year’s end.
3. Increased motivation of all parties at the table. See all those bullet points above, summing up why buyers and sellers are fewer in number during the late Fall and the holiday season? All those same factors make for one more compelling reason to get your home bought or sold soon: the folks who are active right now, both buyers and sellers, are motivated to get deals done.
If you’re in Boston or Minnesota, trust me: the buyers who are willing to pull on their boots and don their parkas to spend their weekends house hunting are no frivolous time-wasters – they are serious home buyers, ready, willing and able to pull the trigger when they find the right place. And the same goes for sellers: someone who’s willing to spend Black Friday scrubbing every nook and cranny to get ready for an Open House, or who is happy to clear the whole family out of the house when everyone else is doing the Thanksgiving Day tryptophan doze is a seller who is motivated to get their home sold, and ready to entertain your offer.
Some banks and asset managers handling short sales and foreclosures even have above-average motivation to move properties off their books and get transactions closed before the year end. This doesn’t mean you can score a mansion for pennies, but it might get you slightly more consideration, responsiveness and speed than you would see in such a transaction earlier in the year.
4. Transaction-related tax deductions. When I bought my first home, I closed escrow on December 30th of that year, by design. I had just graduated from school, had seen a major uptick in income and was on a mission to score the tax perks of closing escrow at the end of the year. First off, any mortgage interest you pay in 2012 will be deductible in 2013 – while that might not seem like it could possibly be much, the real deal is that at closing, you pay all of your mortgage interest from the date you close through the end of that month. And at the beginning of your loan, most of your monthly mortgage payment is interest, so that could tally up to be a nice little, wholly deductible sum.
Second, if you prepay mortgage “points” at closing in order to get a lower interest rate for the life of your mortgage loan, the IRS considers those points to be prepaid mortgage interest. And I’ll do you one better: if your contract requires the seller to pay points toward your mortgage, you – the buyer – can also deduct those points on your 2012 tax return! (The IRS says so, but please don’t take my word for it – get a tax advisor to give you a personalised assessment of precisely what you can and cannot deduct in any given tax year.)
Finally, there are other closing costs that are deductible, buyers, on the return you can file as early as January, 2013. The most notable of these are property taxes, but you might also have some moving cost deductions, if you relocated for work and moved far enough to meet IRS guidelines. (Again, consult with a tax pro. I insist.)
5. Interest rate certainty. If you’ve been on Facebook at all lately (!), you might have noticed that there’s an election coming up here soon. There may or may not be an administration change, but regardless of what happens with the election, there’s always the chance that the new year will bring new priorities, on a national policy level. The federal government, the Fed and other interest-rate impacting organisations have kept a very tight lid on mortgage rates throughout recent history in an effort to help our nation recover from the recession. But there’s no way now to know precisely how rates will change in the New Year.
Closing escrow on your home purchase before the year is over is the only failsafe way to lock in low rates now for the life of your home loan.
While you might not have 100 per cent control over whether or not you can close escrow on your purchase or sale by December 31st, you probably have more than you think:
- buyers can get serious about getting out there, getting pre-approved and seeing homes as soon as they come on the market, even when the weather is bad, and
- sellers can heed any advice you’ve been ignoring from your agent on the matter of how to move your lagging home off the market (staging and price-slashing tend to be themes).
Agents: What’s your #1 piece of advice for current house hunters who want to close escrow by year’s end? And for sellers?
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