This article concludes our 3-part series of articles for people who want to sell their homes without realtor assistance (see recommendation to always hire a realtor in Part 1 of this article series). In this article, we describe some of the things that a seller can expect in a real estate sale transaction.
A typical real estate sale transaction will probably include some or all of these steps:
- A potential buyer may work with a realtor, who will prepare and present the buyer’s offer to purchase the real estate, and the realtor will represent the buyer in negotiations. Experienced realtors have tremendous knowledge about many real estate transaction variables, so a seller must be prepared to understand real estate contract terminology.
- Most buyers obtain bank financing for real estate purchases, and most banks require written purchase agreements that show real estate descriptions and the terms and conditions of sale.
- The bank (or realtor) will probably order the title insurance for the transaction, but is usually the seller’s prerogative to order title insurance because most real estate transactions require the seller to pay title insurance costs.
- The title company will research the real estate title and prepare a commitment for issuance of a title insurance policy to ensure the buyer’s real estate title quality and the bank’s mortgage title quality.
- The title company will coordinate with the seller, the buyer, the realtor, and the bank to schedule a closing.
- The title company will usually manage the closing, including notarization of the seller’s signature, deduction the seller’s share of the closing costs from the sale proceeds, and issuance of checks to pay off the seller’s mortgage loan payable and pay the remaining sale proceeds to the seller.
- The title company will also deliver IRS Form 1099-S to the seller and file IRS Form 1065 to report the sale proceeds to the IRS.
If the seller has occupied the home as the seller’s principal residence for two of the preceding five years, the seller can exclude from capital gains taxation any gain on the sale above what the seller has paid for the real estate up to $250,000 ($500,000 for certain married taxpayers who file a joint return).
Property taxes are imposed in arrears, so for example, the 2017 property taxes will become due and payable in May and November of 2018, and the 2018 property taxes will be due in May and November 2019. A seller already owes the 2017 property taxes, even though the county treasurer has not yet prepared the tax bill. The seller also owes part of the 2018 property taxes because the seller has owned the real estate in January and part of February 2018.
The title company will allocate property taxes between the parties in the real estate closing transaction with the property tax proration that usually works like this:
- calculate the property taxes that it will deduct from the seller’s share sale proceeds by using the most recent amount of property taxes for the real estate and assuming that the amount of property taxes will remain the same for the 2017 property taxes that are due and payable this year;
- deduct from the seller share of the sale proceeds the amount of 2017 property taxes that, of course, have not yet been paid in 2018;
- calculate the seller share of the 2018 property taxes by using the total annual tax value, dividing that value by the number of days in the year, and multiplying the result by the number of days of this year that have passed up to the day of closing to determine the portion of property taxes related to your 2018 ownership of the real estate; and
- then, the buyer will owe all of the property taxes that become due and payable after the date of closing so that the seller will not have to pay the property taxes that would ordinarily be the property owner’s responsibility.
These steps do not cover all of the various issues that a seller will probably encounter, but the seller’s lawyer should be able to help deal with the remaining issues.
Jeff R. Hawkins and Jennifer J. Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers and active members of the Indiana State Bar Association and National Academy of Elder Law Attorneys. Both lawyers are admitted to practice law in Indiana, and Jeff Hawkins is admitted to practice law in Illinois. Jeff is also a registered civil mediator, a Fellow of the American College of Trust and Estate Counsel and the Indiana Bar Foundation; a member of the Illinois State Bar Association and the Indiana Association of Mediators; and he was the 2014-15 President of the Indiana State Bar Association.
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