Congress Renews $5000 DC First Time Homebuyer Credit

Hidden in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, signed by the President on Friday, was a provision extending the $5,000 tax credit for first-time homebuyers in DC for another 2 years. The tax credit had expired at the end of 2009 and was renewed for 2010 and 2011. The Federal tax credit is a $5,000 below-the-line credit against federal taxes for the purchase of a home in DC for taxpayers that did not own a principal residence in DC during the previous year. As happened this year, the credit usually expires and is renewed retroactively at the end of the year, leaving homebuyers a period of uncertainty about the tax ramifications of their purchase. The credit was tucked into the tax deal extending tax rates across the board to their current levels. The nationwide $8,000 tax credit for purchasing a home expired last summer. 

Washington DC real estate development news

Congress Passes $8,000 Credit Extension

Congress has passed the bill to extend the $8,000 homebuyer tax credit, giving purchasers an additional three months to complete purchases for contracts that were ratified by April 30th. The bill now goes before President Obama, who has said he will sign the legislation. Buyers now have until September 30th to settle and qualify for the credit; the National Association of Realtors has said that up to 180,000 buyers would "lose their tax credit through no fault of their own" in a system that had gotten overwhelmed by the flurry of activity spawned by the credit. The bill does not affect homebuyers in Washington DC, who still qualify for the $5,000 tax credit.

Senate Approves $8k Tax Credit Extension

The Senate yesterday voted to provide homebuyers with an additional three months to complete their home purchase. The credit, which would have expired June 30, provides an $8,000 credit against federal taxes for qualifying first-time homebuyers. The extension will affect only those sales already pending (or new backdated contracts; wait, that's not legal), but gives them until September 30th to settle. The bill has not yet been approved by the House, but is expected to pass and be signed by the President. Homebuyers in Washington DC will still enjoy the $5,000 tax credit, which extends through the end of the year.

DC Tax Sale Rescheduled

The Office of Tax and Revenue has rescheduled its tax sale for November 30th. The tax sale, originally scheduled for September, had been canceled after a legal challenge to the process. Interested parties can register from Nov. 23rd - 25th, those who had registered prior to the September deadline need not register again. The auction is not in fact a sale, as no property changes hands on that date. Auction bidders win a claim against the property, and may eventually begin a judicial foreclosure process, but original owners retain the property in the short term and have a statutory right to pay off the bidder and clear the title to their home. And so while most property owners delinquent as of last year will exercise their rights and retain their homes, auction bidders often come away with the right to charge penalties on the property. The auction will be held at 941 N. Capitol Street. 

Washington DC real estate news

Congress Passes Homebuyer Credit

After the Senate's approval yesterday (98-0) of the extended homebuyer tax credit, the House followed suit and passed H.R. 3548, which includes a tax credit amendment, putting the bill in the lap of President Obama who is expected to sign it into law. The bill extends the tax credit and widen its breadth to include more buyers, who now have until April to dither. The new law will extend the $8,000 credit for first-time homebuyers who contract for a property by April 30, 2010 and settle by July 1. Unlike the current law, homebuyers that are not first-timers will get a $6500 federal tax credit, and raise the qualifying income from $75,000 to $125,000 for singles and from $150,000 to $225,000 for couples. In a small dose of fiscal restraint, Congress this time around capped the purchase price at $800,000.

Court Upholds Tax Deductions for DC Easements

The U.S. Tax Court has upheld a tax deduction for a property owner in Washington DC who claimed a tax deduction for a property easement, finding against the IRS. The IRS has sought to end tax deductions for donations of historic easements, a common practice among historic properties in the District.

In Simmons v. Commissioner (T.C. Memo. 2009-208), the court ruled in September that two easements made to The L'Enfant Trust , at 17 Logan Circle (pictured) and 1503 Vermont Avenue, were valid charitable contributions, warranting federal tax deductions valued at 5% of the property's value. Preservation easements are common agreements between the owner of a historic or archaeologically significant property and a charitable organization that is chartered to preserve such properties. The agreement grants the charitable organization a legal right to control that portion of the property, a right which is recorded and retained in perpetuity. The property owner's grant to the charity results in a donation, the amount of which is therefore deductible as charitable. Grants in Washington DC generally involve the facade of a property, which thereafter cannot be altered without the consent of the charitable organization.

The L'Enfant Trust requires property owners to affix a plaque on the facade, maintain the subject portion of the property, and make cash contributions to the Trust to facilitate future enforcement. The IRS has disputed this practice, finding no deductible donation. In the case of Simmons, the IRS disputed that the easement had any value, and that the statutory requirements for grants had been met. The Tax Court disagreed, finding that easements do affect the fair market value of the property, in this case by 5%.

While the IRS allows for charitable deductions for a portion of a property (Section 170 (f)(3)(B)(iii), since you were wondering), the IRS determined that in this case L'Enfant could, theoretically, consent to a change in the facade, countermanding the preservation aspect, and that the mortgage was not subordinated to the easement, making it invalid. The court disagreed with the latter, and found it sufficient that the stated purpose of the easement was preservation, finding that the Trust had the legal means to enforce preservation against the owner. The IRS argued in the alternative that the appraiser, who found an 11% decline in the value of the property resulting from the easement, botched (not their words) the appraisal. While that may be a common complaint in the real estate industry, here the court again disagreed, finding 'before' and 'after' values of properties with easements showed a decline in value, though finding only half the drop the appraiser found.

While the ruling applied strictly to federal taxation, and to the L'Enfant Trust in particular, many states and localities have similar statutes and deduction rules, and the logic of the court's ruling will likely support such statutes as well as other charitable organizations.

Last Chance to Buy a Co-op, Taxes Start October 1st

Considering a co-op for your next home, or getting out of one? Going to settlement this month will be the only way to avoid the hefty taxes that co-op buyers and sellers were once immune to. Thanks to an amendment nestled away in the DC Budget Support Act, the tax benefits of purchasing a co-op will cease to exist as of October 1st. Called the "Economic Interests in Real Property Clarification Amendment Act of 2009," the Act might be better dubbed the co-op killer of 2009. The sale of co-ops, technically a transfer of an economic interest more akin to the purchaser of stock than a transfer in title, is not currently taxed by the District of Columbia. The absence of recordation taxes is one of the few incentives to buying into a cooperative, most of which have more onerous rules than condominiums, carry underlying obligations to the purchaser, and bestow on the Board of Directors the power to reject applicants, all of which tends to suppress the price of co-ops below that of an equivalent condominium. The amendment changes the phrase in the Deed Recordation Tax Act (Section 302b(a) to be specific) from "a transfer of an economic interest in real property" to "a transfer of an economic interest in real property, including shares in a cooperative housing association." Henceforth, co-op buyers, and sellers, will be subject to the same 1.1 % (for properties selling below $400,000) to 1.45% transaction tax that applies to other types of property.

DC Tax Sale Canceled

Washington DC's property sale for unpaid real estate taxes was canceled today. The annual sale was scheduled to begin today, but bidders occupying seats at 941 North Capitol Street were reportedly put on hold several times, only to be told in the afternoon that the tax sale was canceled "indefinitely." DC government officials confirmed that the sale was "postponed," and would be "rescheduled," but gave no timeline for the process.

Registration for the District's tax auction for property in tax arrears began August 31, and the auction was to have started today, lasting until all properties had been disposed of. While District officials would not comment further than to say that a challenge had been filed "to the District's right to set a threshold for the sale of delinquent real property taxes", sources said that the an investor and auction participant had filed a challenge to the process by which the District conducts auctions, seeking an injunction against the auction.

The District had delayed the previous tax sale due to the scandal in the Office of Tax and Revenue.

DC v. Federal Tax Credits

A follow up on our recent post about the $8,000 tax credit that will soon expire, and its possible termination, extension, or even expansion: Washington DC real estate shoppers already have a tax credit available to them, a $5,000 credit, also courtesy of the federal government. While the DC-only credit is smaller, there are some advantages to the smaller credit that a buyer should consider.

While the $8,000 credit is available only to purchasers who did not own a principal residence in the three years prior, the DC credit excludes only those buyers that owned a principal residence during the prior year, and only in DC. And the DC credit requires no repayment, even if the residence is sold within three years of purchase, unlike the $8,000 credit. For a full breakdown, see the chart below

$8,000 Credit	$5,000 DC Credit	$15,000 credit (proposed)
Anywhere in U.S.	Only in D.C.	Anywhere in U.S.
Purchased principal residence by 11/30/09	Purchased principal residence in 2009 (subject to annual renewal)	Purchased within 1 year of bill’s passage.
Did not own a principal residence during preceding 3 years	Did not own a DC principal residence in D.C. during preceding year	Other: Divisible into 2 years
Ineligible if modified AGI is $95,000 or greater ($170,000 if MFJ). Phase out begins at $75,000 ($150,000 MFJ)	Ineligible if modified AGI $90,000 or greater ($130,000 MFJ). Phase out begins at $70,000 ($110,000 MFJ)
Cannot claim if claimed D.C. First-Time Homebuyer Credit in any prior year	Cannot claim if eligible for First-Time Homebuyer Credit or if previously claimed the D.C. First-Time Homebuyer Credit	Cannot claim with any other homebuyer credit
Repayment required if the residence is sold within 36 months	No repayment	Repayment if residence is sold within 24 months

DC Property Tax Auction: All Inventory Must Go!

Washington DC's tax sale is on. Well, almost. Registration for the District's tax sale auction for property in tax arrears begins on Monday, August 31, and ends September 4th, so don't delay - act now - to get your next house on the cheap. The auction of delinquent properties will take place starting Wednesday, September 9th, and continue until all properties delinquent as of October 1, 2008, have been sold.

Property with less than $1,000 in back taxes may be put on the block to a willing bidder. So is this the place to pick up the home you thought you couldn't afford? Not really, says David Kanstoroom, a title attorney with North American Title. Because the District provides a statutory right of redemption (an American value, you know) for auctioned properties, wayward owners may pay the back taxes, penalties and interest, and in so doing reclaim the property. "A high rate of these properties - 90 plus percent - are ultimately redeemed by the original owner" says Kanstoroom. According to Andrew Schechter of M and M Search Service, a title search abstractor and auctioneer, the point of the auction is often not to obtain title to a property, but to invest in a distressed property and collect interest from the previous homeowner.

Auction participants, who technically purchase the lien on the property, not the actual title, are entitled by DC law to earn 1.5% interest, per month, on the tax lien amount, to the homeowner that wants to redeem the property. Investors are therefore bidding on the amount of the tax lien, plus whatever surplus they determine the investment will justify.

Schechter notes that 4 months after the tax sale, investors can begin charging homeowners for actual title search costs, and 6 months after the tax sale they can begin charging "reasonable" attorneys' fees, a point at which the real money may kick in. Because the process is judicial, rather than administrative, the length of time to process the sale is determined by the court, but a case cannot be opened until 6 months after the tax sale.

Homeowners will still have to contend with penalties by the District, and any other outstanding liens, but according to Schechter, the District's intent is not to make tax sales an easy route to home purchasing. While it may be easier in Maryland, where the homeowner conducts the same type of transaction directly with the state, rather than a private investor, Schechter says the message from the DC government is simple: Don't attend the auction to pick up the home, go for the high interest accrued on the delinquent taxes. If its ownership you're looking for, you'll just have to go about it the old-fashioned way and search online.

The sale will be held at 941 North Capital Street, 4th floor.

Tax Credit: Buy Now! Or Wait...

Fence-sitters beware: The $8,000 first-time home-buyer tax credit is about to expire, leaving one of the nation's best giveaways (unless you're a GM union worker, or banking exec, or car salesman) near its end. The tax credit, signed in February, was one of President Obama's initiatives to jolt the economy, and provides an $8,000 credit back - not just a deduction - regardless of the amount of taxes owed, leaving the purchase of a home a huge, legal income tax refuge (see your accountant for details). But the tax credit expires November 30, 2009. Assuming a typical 30 day settlement on the purchase of a new property, buyers have only until October 30th to have a real estate contract in hand. So, assuming you are a first-time homebuyer that makes less than $75,000 ($150,000 for couples), run, don't walk, to your local agent, and begin finding the right home today for the season's best tax dodge. Unless you're a gambler, that is. The income tax credit has been politically popular, and several bills moving through Congress aim to extend the deadline - or even increase it. One such bill, S. 1230, sponsored by Senator Johnny Isakson (R-GA), would replace the current credit with a $15,000 credit, not restricted by income or to first-time home-buyers. "The problem is in the move-up market, not the first-time home-buyer market" explains Isakson's Deputy Press Secretary Marie Gordon. Hence the extension and expansion. Isakson's bill has 14 Republican and 2 Democratic cosponsors, and was only narrowly defeated (47-50) in a recent floor vote. Gordon says the bill will come up again, and feels optimistic that the concept is gaining support. The NAR and NAHB have both enthusiastically supported it - no surprise there - and are working toward its passage. But will it pass? Congress might just be too engrossed in health care to make it happen any time soon, or find the budget numbers so staggeringly lopsided that they cannot afford it, leaving passive buyers wishing they had acted sooner. Then again, it might pay to wait.

DC Proposes Tax on Co-op Sales

The Washington, DC Council has proposed taxing the sale of co-ops in the District, a move that would bring the transaction tax on co-op units into tax parity with the sale of fee simple and condominium sales. The new tax measure, buried deep in the Fiscal Year 2010 Budget Support Act of 2009, proposed by Chairman Vincent Grey, proposes to add a transaction fee to the sale of a co-op unit for both the buyer and the seller - 1.1% for sales under $400,000, 1.45% otherwise.

The sale of co-ops, technically a transfer of an economic interest rather than transfer in title, is not currently taxed by the District of Columbia; the proposed law would add an "economic equivalent" tax at the same rate as the transfer (tax on the seller) and recordation (tax on the buyer) taxes currently imposed by the District. While co-ops represent only a small fraction of real estate transactions, the District reckons it could pull in an additional $5m to $6m per annum for the next few years with the additional tax burden, compared to the $118m the District siphoned from transfer and recordation taxes last year.

The absence of recordation taxes is one of the few incentives to buying into a cooperative, most of which have more onerous rules than condominiums, carry underlying obligations to the purchaser, and bestow on the Board of Directors the power to reject applicants, all of which tends to suppress the price of co-ops below that of an equivalent condominium. The tax would take effect next year. In other words, sell now.

The DC Council Raises Property Transfer Tax

The District Council voted this week to raise the transfer and recordation tax – paid by purchasers and sellers of property, respectively – from 1.1% to 1.45% of the sale price of commercial and residential property, for a total rate of 2.9%. The District, which currently has the highest average transfer tax of the 3 jurisdictions and considered alternatively raising the tax to 1.35% and an amendment by Councilman Barry for as much as 1.5%, will use the revenue to fund various projects, including, without apparent sense of irony, affordable housing initiatives. The legislation, which maintains the 1.1% tax on property sold for less than $400,000, is expected to be signed by the mayor.