Ask Eli

This regularly scheduled sponsored Q&A column is written by Eli Tucker, Arlington-based Realtor and Arlington resident. Please submit your questions to him via email for response in future columns. Video summaries of some articles can be found on YouTube on the Eli Residential channel. Enjoy!

Question: I’ve been hearing about a lot of changes to real estate laws lately, can you explain what’s changing?

Answer: We have entered the transition period of significant changes to the operations of residential real estate across the entire country — led by the massive class action lawsuits and heavy hand (and opinions) of the Department of Justice over buyer agency commission. I wrote about these changes in this March article and will dedicate at least one or two more columns to them in the near future.

The commission-related changes will capture the most attention from consumers, agents, brokers, attorneys, etc but there are other unrelated changes being introduced this year that would normally be worthy of their own headlines, but are overshadowed by the commission storylines, so this week I’ll highlight three consequential upcoming changes that are important to recognize.

Negotiable HOA/Condo Three-Day Review Period

For years, Virginia law gave buyers purchasing a home in an Association three days to review the Association’s resale package/certificate (by-laws, budget, reserves, violations, etc) from the time it was delivered or three days from the purchase contract being ratified, if delivered on or before ratification. A buyer can void the contract at any time within this three-day review period, by delivering unilateral Notice to Void (yes, it can be used as a “get out of jail free card”). Other states have similar laws — D.C. is three business days and Maryland is seven days for condos and five for HOAs.

Last year, the governing code for the condo and POA/HOA resale disclosures, previously two separate codes, was combined into one code (linked here). When this happened, the requirement for a three-day review period was MISTAKENLY (at least, that’s what I’ve been told by attorneys in the know) deleted which led to a lot of confusion in the real estate community over whether the three-day Association review period could now be removed by the buyer and seller because it was no longer protected by Virginia law.

In response, the Northern Virginia Association of Realtors (NVAR) and most brokerages issued guidance saying that the review period should not be removed because it was untested legally and Virginia did not actually intend to delete that language.

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This regularly scheduled sponsored Q&A column is written by Eli Tucker, Arlington-based Realtor and Arlington resident. Please submit your questions to him via email for response in future columns. Video summaries of some articles can be found on YouTube on the Eli Residential channel. Enjoy!

Question: Do I need to purchase another home after I sell my current home to avoid paying taxes?

Answer: I often talk with people who conflate two different real estate tax concepts — the capital gains exemption and the 1031 exchange. A misunderstanding of these two very different concepts can lead to improper planning and avoidable mistakes so I’ll spend this week’s column helping you understand the difference.

One is for Primary Residence, One is for Investment Properties

The most basic difference is that the capital gains exemption applies specifically to the sale of a current or former (see details below for former) primary residence and the 1031 exchange applies specifically to the sale of an investment property.

One Requires the Purchase of Another Property, One Does Not

I often hear people mix-up what they have to do with the proceeds of a real estate sale to qualify for the tax benefit. To benefit from a 1031 exchange (investment property) you must purchase another like-kind investment property soon after the sale is completed. The benefits of the capital gains exemption are earned at the time of the sale, regardless of what you do with the proceeds or if you ever buy another property again.

Capital Gains Exemption on the Sale of a Primary Residence

The capital gains exemption allows homeowners to exclude a significant amount of profit from the sale of their primary residence. For single filers, up to $250,000 of capital gains can be excluded. For married couples filing jointly, the exclusion amount doubles to $500,000. The gain is calculated by subtracting your cost basis for the property (original purchase price, capital improvements, selling costs) from the sale price.

Qualifying Criteria

• Ownership/Use Test: The home must have been your primary residence for at least two out of the last five years before the sale. These years do not need to be consecutive. In practice, that means that if you decide to rent your home after moving out, you’ll lose the capital gains exemption if you rent for 3+ years.
• Frequency: This benefit can be claimed once every two years.

Special Considerations

• Partial Exclusion: If you don’t meet the full criteria for the ownership/use tests, you might still qualify for a partial exclusion under certain circumstances, such as a change in employment, health issues, or unforeseen circumstances.
• Home Office Deduction: If you’ve claimed a home office deduction, you’ll need to account for that portion of your home’s value separately when calculating your gain.
• Improvements and Selling Costs: Keep records of any home improvements and selling costs, as these can be added to your cost basis, reducing your capital gain.

1031 Exchange on the Sale of an Investment Property

While the capital gains exemption is for primary residences, the 1031 exchange is a powerful tool for real estate investors. Named after Section 1031 of the Internal Revenue Code, this strategy allows investors to defer paying capital gains taxes on investment properties when they reinvest the proceeds into a like-kind property.

Qualifying Criteria

• Like-Kind Property: The properties involved in the exchange must be of like-kind, which generally means they are both investment or business properties. The definition of like-kind is quite broad, allowing for flexibility in the types of properties exchanged.
• Timing:
  • Identification Period: You must identify potential replacement properties within 45 days of selling your original property.
  • Exchange Period: The purchase of the replacement property must be completed within 180 days of the sale.
• Use of Intermediary: You must use a qualified intermediary to handle the transaction. This intermediary facilitates the exchange by holding the proceeds from the sale of the original property and using them to purchase the replacement property.

Special Considerations

• Depreciation Recapture: When you eventually sell the replacement property without another 1031 exchange, you will owe taxes on the depreciation taken on the original property.
• Higher Basis: By deferring taxes, your basis in the new property will be lower, which could result in higher capital gains taxes when you sell it in the future.
• Estate Planning: Heirs can benefit from a stepped-up basis to the market value at the time of the owner’s death, potentially eliminating the deferred gains.

Consult a Tax Professional

It’s important to consult with a tax professional to ensure you understand the tax implications or benefits of keeping or selling property, especially during or after significant life events like a divorce or death. A tax professional can provide tailored advice and help you navigate these complex rules, ensuring you make the most financially advantageous decisions.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at [email protected].

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to [email protected]. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Eli Residential channel.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH Real Estate, 4040 N Fairfax Dr #10CA

This regularly scheduled sponsored Q&A column is written by Eli Tucker, Arlington-based Realtor and Arlington resident. Please submit your questions to him via email for response in future columns. Video summaries of some articles can be found on YouTube on the Eli Residential channel. Enjoy!

Question: Can you provide an outline of the mortgage process for homebuying?

Navigating the mortgage process can feel daunting, especially if you are a first-time homebuyer or if it’s been a while since your last purchase. Understanding each step can help ensure a smooth journey from pre-approval to closing.

This week I enlisted Jake Ryon of First Home Mortgage ([email protected]) to help me outline the mortgage process from start to finish. I have worked with Jake for many years and highly recommend him.

Step 1: Pre-Approval

Before beginning your search for a new home, you’ll want to get pre-approved for a mortgage. Pre-approval provides you with a clear understanding of your budget, identifies any issues or surprises in your financials, and demonstrates to sellers that you are a serious buyer. Here’s what goes into a pre-approval:

• Credit Check: Your credit score significantly influences your loan terms. This is classified as a “hard” credit check, but you can have multiple lenders run your credit within 14 days and it’ll count as just one hit on your credit score.
• Documentation: Be prepared to provide proof of income (such as pay stubs and tax returns), employment history, and assets (such as bank statements).
• Debt-to-Income Ratio: Lenders want to ensure you can manage your mortgage payments alongside your other debts. Strive to keep your debt-to-income ratio below 43%.

Step 2: Making an Offer

Once you have found a suitable property, it’s time to make an offer. You will submit your pre-approval letter along with your offer so that the seller knows you can afford to make the purchase you’re offering to make. Having a thorough pre-approval and a lender who is available to speak with the seller’s agent about your qualifications makes a big difference in how your offer is considered by the seller.

Step 3: Loan Application

After your offer is accepted, you will officially apply for your mortgage. Here’s some of what to expect:

• Complete the Application: Despite being pre-approved, you will need to provide updated documentation and complete a full loan application.
• Home Appraisal: The lender will order an appraisal to verify that the property is worth what you’ve offered to pay. If the home appraises for less than the purchase price, you may have to increase your downpayment if you do not have the protection of an appraisal contingency.
• Title Search: A title company will conduct a title search to ensure there are no issues with the property’s title, confirming it can legally be transferred to you.
• Homeowners Insurance: You are required to obtain a minimum level of homeowners insurance to qualify for your loan.
• Condo/HOA Approval: If you are purchasing in a condo or homeowners association, the lender will request specific information from the association to ensure it is warrantable.

Step 4: Underwriting

During underwriting, the lender’s team reviews your entire file. They will verify your income, assets, debts, and credit history. Additional documents may be requested during this stage, and it is important to respond promptly to avoid delays.

Step 5: Closing Disclosure

Three days before closing, you will receive a Closing Disclosure (CD). This document outlines the final terms of your loan, including your interest rate, monthly payments, and closing costs. Carefully review the CD and compare it to your original Loan Estimate to ensure accuracy.

Step 6: Closing

Closing day is when the transaction is completed. Here’s what to expect:

• Sign Documents: You will sign numerous documents, including the mortgage agreement and deed of trust.
• Pay Closing Costs and Downpayment: Be prepared to pay your downpayment and closing costs, which typically range from 2-3% of the purchase price in Northern Virginia. These costs include title fees, loan origination fees, transfer taxes, and tax escrows.
• Deed Recording: Once all documents are signed by both parties and the funds are received, the title company will record the deed at the local courthouse and the transaction will be official.

Tips for a Smooth Process

1. Stay Organized: Keep all your documents in one place and respond promptly to any requests from your lender.
2. Maintain Your Credit: Avoid making large purchases or opening new credit accounts during the mortgage process.
3. Communicate: Maintain open communication with your lender and real estate agent. If you have any questions, do not hesitate to ask.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at [email protected].

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to [email protected]. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Eli Residential channel.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH Real Estate, 4040 N Fairfax Dr #10CA

This regularly scheduled sponsored Q&A column is written by Eli Tucker, Arlington-based Realtor and Arlington resident. Please submit your questions to him via email for response in future columns. Video summaries of some articles can be found on YouTube on the Eli Residential channel. Enjoy!

Question: My spouse and I are going through a divorce and we have a mortgage with great interest rate. Do we have any options that would allow one of us to be removed from the mortgage without refinancing into a higher rate?

Answer: Thanks to Paul Nagel of Main Street Home Loans for his insights in drafting this article. You can contact him at [email protected] or (703) 201-5147 for additional follow-up or any of your mortgage needs.

Going through a divorce is tough enough without having to deal with the headache of dealing with your mortgage. With over 70% of homeowners currently holding mortgages with interest rates much lower than today’s rates (source: New York Times), divorcing couples often face a difficult decision dealing with an existing mortgage.

Problem: To Refinance or Not

The common dilemma divorcing couples face these days is removing one partner from an existing mortgage without taking a huge financial hit brought on by refinancing (the most common way of removing somebody from a mortgage) into a much higher interest rate.

By not removing the departing spouse from the mortgage, it hampers the departing spouses’ ability to buy another home and exposes the departing spouse to risk of non-payment by the spouse who remains in the home.

(Potential) Solution: Specific Language in the Divorce Decree

The divorce decree can be a lifesaver here allowing the spouse staying in the home to keep the low interest rate and the one moving out isn’t financially tied to the house. Both parties need to agree and sign off that:

• Refinancing is not required
• The vacating spouse out isn’t responsible for the mortgage, taxes, insurance, or HOA fees
• Both names stay on the mortgage, but only one spouse is responsible for making the payments

Other Considerations

• Removal of Mortgage from Departing Spouses Credit: Often, the vacating spouse can contact the mortgage company to get the mortgage taken off their credit report. It’s not guaranteed, but many mortgage servicers will do this with a court-recognized divorce decree, protecting the departing spouse’s credit if payments aren’t made.
• Separate Bank Accounts: After the divorce, close all joint bank accounts. The mortgage should be paid from an account that’s only in the name of the spouse responsible for the payments.
• Legal Enforcement: The agreement must be signed by both parties and recognized by a court of law in the divorcing couple’s state
• Documentation: When applying for a new home loan post-divorce, lenders will want to see all pages of the divorce decree and separation agreements. Be ready to provide these documents.
• Consult a Tax Professional: Don’t forget to talk to a tax professional to understand any tax implications/benefits of keeping or selling the property during or after the divorce

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at [email protected].

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to [email protected]. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.

Video summaries of some articles can be found on YouTube on the Eli Residential channel.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH Real Estate, 4040 N Fairfax Dr #10CA