Buying a Home
Legal and Tax Issues
There are many factors to consider in buying a home in the Washington area, including location, transportation, schools, friends and other normal considerations taken into account in buying a home. This memorandum focuses on the legal and tax issues facing a home buyer in this area and outlines the differences among the three jurisdictions - Maryland, Virginia and the District of Columbia.
THIS MATERIAL IS PRESENTED WITHOUT CHARGE AND AS A CONVENIENCE TO THE POTENTIAL HOMEBUYER AND IS NOT INTENDED AS LEGAL ADVICE. EVERY BUYER SHOULD CONSULT AN ATTORNEY QUALIFIED IN THE JURISDICTION IN WHICH THEY ARE CONSIDERING THE PURCHASE OF A RESIDENCE.
II. CONTRACTS AND SETTLEMENTS
1. Sales Contracts - After you have chosen the home you wish to purchase the next step in buying a home is the sales contract. The Boards of Realtors in each of the three jurisdictions have adopted and approved a standard form of sales agreement and generally these agreements have worked well for buyers as well as sellers; however, each transaction is different and there are many clauses which should be specially reviewed and tailored to each buyer's individual situation.
Keep in mind that ALL terms of the agreement are negotiable. Although the standard form agreements serve a valuable purpose they are not etched in stone and they should be modified to suite your particular purposes.
As elementary as it seems, the most important piece of advice to the prospective buyer is to read the entire contract. Be certain that each of the elements of YOUR deal is addressed. Some things to consider are:
- What conveys with the house? Curtains? Appliances? Carpets? etc.
- Which party pays for which costs? i.e., Real Estate agent's fees, survey, pest inspection, home inspection, lender's points, settlement costs, recordation fees (common practice is that if the contract does not specify who pays, the recording fees are split between the parties).
- Should this contract be contingent? On financing? On sale of current home? On home inspection? A contingent contract is less attractive to the seller; however, sometimes it is a necessity from the buyer's perspective.
- Is the property being sold "as is"? Be aware that the seller gives no warranties with respect to a house sold "as is".
In general, there are only minor differences among the three jurisdictions in the contracting process so each of these caveats is applicable regardless of where you purchase your home.
If you choose to purchase new construction, you should be aware that the area builders each prepare their own contract forms which differ from the standard realtor form agreement. As a general rule the builders are tough negotiators and are often reluctant to bend on the terms of their prepared forms. This does not mean you should not attempt to negotiate; however, you should be prepared to be persistent. Issues to consider for a builder's contract are:
- What is the completion date of construction? Can you live with the outside time frame proposed by the builder?
- What type of construction warranty will the builder give? (Look for H.O.W. program; it is the best in the industry).
- Will the builder give you protection against mechanic's liens? (Particularly a problem in Virginia).
- Which items in the house are standard and which are optional? Are the costs of these items built into the price of the house or is there an extra charge?
- What type of landscaping is standard with the house? Does the builder disclaim liability for damage to trees and shrubbery due to construction?
- Is there an additional charge for a particular lot premium?
Regardless of whether you purchase new construction or a resale property, you should always question the applicable zoning in the area. Consider the following:
- Is there any proposed construction, rezoning, street widening, etc. that would impair your enjoyment or resale or the property?
- Is the property a part of a home owner's association? If so, you have the right to review the applicable documents. If the documents are not offered to you, request to see them.
A word about the role of the broker: A good broker can be a great asset to the buyer and can be of enormous help. But, it should be remembered that the broker is attempting to make the deal and should not be asked to perform legal counseling. Also, be careful not to involve more than one broker in connection with the same property; it could be costly and expose you to the payment of an extra commission.
2. Settlements - All settlements in this area are conducted at the offices of a title company or settlement attorney. For example, this office has a settlement attorney, who is licensed in DC, Maryland,Virginia and West Virginia. The purchaser has the absolute right to select the place of settlement subject only to the approval of their lender, which is almost never withheld.
Settlements are normally attended personally by both parties, but there is no requirement that either party attend. From the buyers' point of view, they must sign the closing statement, and the loan documents and these documents can be signed in advance. However, it is normally preferable to attend or send an authorized experienced representative. Many unexpected matters can arise at settlement which require attention. For example, as a result of purchaser's walk-through the day before closing, conditions are discovered which require correction according to the contract. The purchaser or his representative should be present to negotiate either a price reduction or an escrow fund to be sure the seller performs the required repairs.
Usually time is of the essence in settlements. Don't be late. While it doesn't happen often, a purchaser who doesn't show up for settlement on the day specified for closing risks the loss of the deposit.
3. Costs - The cost of certain items or services related to purchasing a home are comparable throughout the three jurisdictions. Following are the approximate customary fees:
|1.||Pest Inspection||$ 65.00|
|4.||Realtor's Commission||6% of sales price|
The one area where the costs will vary is with regard to recording fees assessed by the district or the county in which the property is located. Following is a comparison of recording fees in each jurisdiction for a $500,000.00 house:
|Virginia (All Counties)||$ 1,666.66|
|District of Columbia||$14,500.00|
D.C./MARYLAND/VIRGINIA TAX ANALYSIS
1. Real Estate Taxes
District of Columbia realty is assessed annually on January 1st, based on its fair market value from the preceding year. Homeowners pay realty tax in 2 installments: September and March.
The 2008 property tax rate for residences in the District is approximately $.85 per $l00 on full fair market value. For example, the real estate taxes on a District of Columbia home valued at $500,000 would be $3706.00 (after homestead exemption).
Maryland realty is assessed annually on January lst based on its fair market value from the preceding year. Homeowners pay realty tax in full when due, on or before September 30.
The 2008 property tax rate in Montgomery County, Maryland is $.915 per $l00, based upon 40% of the fair market value. For example, the real estate taxes on a Montgomery County residence valued at $500,000 would be $4575.00.
Virginia real estate is subject to annual taxation, based on the fair market value of such property from the preceding year.
The 2008 property tax rate in Fairfax County, Virginia is $.92 per $l00 of fair market value. For example, the real estate taxes on a Fairfax County residence valued at $500,000 would be $4600.00.
The 2008 property tax rate in Arlington County, Virginia is $.818 per $l00 of fair market value. For example, the real estate taxes on an Arlington County residence valued at $500,000 would be $4,090.00.
In all of the examples set forth above, the value used for the tax assessment may not be necessarily be the same as the purchase price of the property. Ask your broker for the amount of prior years' taxes. 2. Income Taxes
Each of the District of Columbia, Maryland and Virginia jurisdictions impose a state income tax on residents using the Federal adjusted gross income as a base line. In general, the deductions and credits allowed in each jurisdiction follow the federal tax rules.
Only a "resident" is subject to tax. The resident test, described below, applies separately to husbands and wives. For example, if a husband and wife move to Washington, D.C. and both intend to remain in Washington, D.C., both are considered residents.
The top rates in the three jurisdictions and the levels of taxable income at which the top rates are imposed are as follows:
|District of Columbia||8.5%||$40,000.00|
|Maryland (Montgomery County)||8.2%||$ 3,000.00|
Who is a "resident" for state income tax purposes?
In D.C., a resident is any individual domiciled within the District of Columbia or who maintains a place of abode in the District for l83 days of the tax year. Federal employees are non residents if they are elected Federal officers, employees of members of Congress who are residents of the employer's state, and officers of the Executive Branch appointed to serve at the pleasure of the President.
In Maryland, a resident is any individual domiciled within Maryland on December 3lst of any tax year or who has resided in Maryland for over 6 months of any tax year.
In Virginia, a resident is any individual domiciled within Virginia or who has a place of abode within Virginia for over l83 days during the tax year. U.S. Congress members are considered non-residents if they are domiciled outside of Virginia. Credits and Transitional Year Problems
The District of Columbia allows its residents a credit against D.C. income tax paid for income tax incurred or paid to another state while a D.C. resident.
If you are a District resident for less than a full year, credits, exemptions and deductions are prorated to the number of months you resided in the District of Columbia. Income received during the period of nonresidence is subtracted from your federal adjusted gross income to determine D. C. adjusted gross income. Less than full year residents may not claim the property tax credit.
Maryland residents are entitled to a credit against Maryland state tax (not local) for income tax paid to another state. However, this credit is denied if the other state allows the Maryland resident a credit.
Maryland returns must show all income reported on the federal return, regardless of where earned. Part year residents may subtract income earned prior to becoming a resident of Maryland. Deductions, credits and exemptions must be prorated to the number of months as a Maryland resident.
In Virginia, residents are entitled to a credit against income tax paid to Virginia for income taxes paid to another state on earned income or business income derived from sources outside of Virginia and subject to taxation by Virginia.
Any person who during the taxable year becomes a resident of Virginia, for purposes of income taxation, shall be taxed as a Virginia resident for only that portion of the taxable year during which he was a resident of Virginia and his personal exemptions shall be reduced to an amount which bears the same ratio to the amount of the full exemptions to which he would be entitled as the number of days during which he was a Virginia resident bears to 365.
The foregoing is necessarily very general and for specific guidance your tax adviser should be consulted.
We hope that the foregoing snapshot of legal and tax issues confronting a homebuyer new to the Washington area has been helpful. Obviously, it is necessarily general and surely will not answer all the questions that will arise. We would be more than pleased to discuss this matter with any reader of this memorandum. Please email us or telephone us at (202) 349-0220. We look forward to being of assistance to you.
The Stewart Title Group
R. Bradley Runyan, Esq.