CHAPTER 13...Tax Act (FIRPTA) • Ensures that withholding taxes from a real estate transaction owned by a foreign person are sufficient • Buyers must withhold 10% of sale amount

CHAPTER 13Closing Real Estate Transactions

Loan Estimate (LE)

• Estimate of credit costs and transaction terms

• Must be provided within 3 business days of loan application

• Creditor is bound to terms of the LE for 10 days

• Previously the Good Faith Estimate (GFE)

DisclosureRequirements

Closing Disclosure• Must be provided 3 business

days prior to settlement

• Summarizes the transaction

• Tells both the buyer and the seller, as of the day of the closing, how much money the seller will “take from” closing; how much the buyer has to “bring to” closing.

• Day of closing is customarily charged to buyer

DisclosureRequirements

• Property survey• Title search• Release of existing liens and

encroachments• Home inspection including

Wood Destroying Organisms (WDO)

• All necessary legal documents

• Homeowners or hazard insurance

• Final walk-through inspection• Deed and other closing

documentsPre-Closing Activities

• Monies divided between buyer and seller

• Have already been paid in advance, or

• Not yet paid and due at closing

• If not stated, it is customary to charge buyer for day of closing

• Page 3 of the Closing Disclosure

Prorated Closing Costs

Debits and Credits

• Debit – second letter of debit is “e” which stands for expense

• Credit- second letter of credit is “r” which stands for receipt

CLOSING STATEMENT - SECTIONSCLOSING STATEMENT WORKSHEET

SELLER'S STATEMENT BUYER'S STATEMENT

DEBIT CREDIT DEBIT CREDIT

Binder deposit

First mortgage balance

Second mortgage balance

PRORATIONS & PREPAYMENTS Rent

Interest: First mortgage

Interest: Second mortgage

Prepayment: First mortgage

Prepayment: Second mortgage

Insurance

Taxes: City

Taxes: County

Abstract: Continuation

Attorney's fee

Documentary stamps

State tax: Deed

State tax: Mortgage note

Intangible tax: Mortgage

Recording: Mortgage

Recording: Deed

Title Insurance

Brokerage BROKER'S STATEMENT Miscellaneous

TO SELLER FROM BUYER

Balance Due

GRAND TOTALS

TOTAL PURCHASE PRICE

EXPENSES

TOTAL: DEBITS & CREDITS

BROKER'S STATEMENTReceipts Disbursements

Binder deposit

Balance due from buyer at closing

Brokerage Fee

Balance due seller at closing

Seller's expenses, less brokerage

Buyer's expense

Other (New Mortgages)

GRAND TOTALS 0.00 0.00



Binder Deposit

First Mortgage Balance

Second Mortgage


New MortgageBinder Deposit

First Mortgage Balance


Loan Payoff

Loan Assumption

CLOSING STATEMENT – SECTIONS

Binder Deposit is a single line entry -

CREDIT buyerTotal Purchase Price is a

double line entry -CREDIT Seller, DEBIT

BuyerFirst Mortgage

(New Mortgage) is a single line entry -

CREDIT buyer

PRORATIONS & PREPAYMENTS

Rent

Prepayment – First Mortgage

Prepayment – Second Mortgage

HOA Dues

Taxes – City

Taxes - County


All Prorations & Prepayments are double line entries. A Debit to the Seller is a Credit to the Buyer and vice versa.






Expenses are DEBITS only*

Abstract/Continuation

Attorney's fee

Documentary stamps

Mortgage Note

State on Deed

Intangible Tax - Mortgage

Mortgage

Deed

Title Insurance

Brokerage BROKER'S STATEMENT Other

EXPENSES

Total Total

*Carry forward to P.3 of the closing disclosure

CLOSING STATEMENT – SECTION 4



Seller’s Credits are usually more than Debits – Equals cash received at closing.

Buyer’s Debits are usually more than Credits – Equals amount Buyer brings to closing.

0.00 0.00 0.00 0.00

0.00 TO SELLER FROM BUYER 0.00

Balance Due

GRAND TOTALS

TOTAL: DEBITS AND CREDITS

CLOSING STATEMENT – SECTION 5

Receipts Disbursements

Binder deposit

Balance due from buyer at closing

Brokerage Fee

Balance due seller at closing

Seller's expenses, less brokerage

Buyer's expense

Other

GRAND TOTALS 0.00 0.00

(New Mortgages) NEW MORTGAGE

Title Closing

Calculating ProrationsTime Line Method (who paid it, who will pay it or who has it)• Used to calculate your used or unused days

Closing DateEnd of MonthBeginning of Month

# of Days # of Days

SellerOwns

BuyerOwns

Closing

Calculating Prorations: Property Taxes (Arrears)Annual property taxes are $5200. Day of closing is April 17 and is allocated to the buyer. What is the amount of tax proration using the 365-day method?

April 17, ClosingTaxes paid in ARREARS

Jan 1st

106 Days

SellerOwns

BuyerOwns

Jan - 31 DaysFeb - 28 DaysMar - 31 DaysApr - 16 Days

106 Days

$5,200/365 x 106 Days = $1,510.14Debit Seller, Credit Buyer

Closing

Assumed Loan April 17Closing

AprilSellerMakes

April 1st

Pmt

SellerOwns

Buyer Owns

April

Buyer Makes May 1st

Payment

May

Interest Arrears April

Debit Seller & Credit Buyer

April 17Closing

April

BuyerOwns

NoPayment

May

Buyer Makes 1st

PaymentJune

New Loan -Prepaid Interest

Debit Buyer

Prepaid Int.

March Interest in arrears

May Interest

SellerOwns

March

Closing

Calculating Prorations: Rent (Prepaid)Rent for April is $1000. Day of closing is April 17 and is usually charged to the buyer. What is the amount of proration since April has 30 days?

April 17Rent is Prepaid

April 30thApril 1st

16 Days

SellerOwns

BuyerOwns

14 Days

$1,000/30 Days x 14 Days = $466.67+ $2,000 last month & securityDebit Seller, Credit Buyer

1st months rent - $1,000 (used)Last months rent - $1,000 (refunded)Security Deposit - $1,000 (refunded)

Closing Disclosure

• Must be provided 3 days prior to the settlement

• Summarizes the transaction

• Tells both the buyer and the seller, as of the day of the closing, how much money the seller will “take from” closing; how much the buyer has to “bring to” closing.

• Previously the HUD-1 form State Taxes in RealEstate Closings

Page 1

Summary of the buyer’s loan and transaction

Page 2

Expenses payable to 3rd parties (single line entries -debits only)

Page 3

Prorations for amounts between the parties (double line entries – debits and credits

Closing Disclosure

Page 4

Additional information about the loan

Page 5

Definitions and lender information Closing Disclosure

SellerTransfer Taxes Whole Stampsx 0.70

Buyer

N

I

S

.002 x New Loan

Sale Price100

= Units

New &Assumed

Loans100

= Units Whole Stampsx 0.35

I knewI NEWNever I ASSUMED

IRS Form 1099S

• Issued to each party to the real estate transaction

• Seller must report the sale on the income tax return

Real Estate ClosingReport Requirements

Definition of Real Estate Broker by the IRS

• Person responsible for the transaction including

• Any attorney or title company

• Mortgage lender

• Seller’s broker

• Buyer’s broker

• Any person designated by the IRS

Real estate broker must report the transaction to the IRS and provide copies to the parties


Foreign Investment in Real Property Tax Act (FIRPTA)• Ensures that withholding taxes from

a real estate transaction owned by a foreign person are sufficient• Buyers must withhold 10% of

sale amount• Amount realized is over

$300,000 up to $1,000,000• Buyers must withhold 15% of sale

amount• Amount realized is over

$1,000,000• Withheld funds are sent to the IRS• Note: this does not apply to a

purchaser of a personal residence for a price of $300,000 or less


Coffee Break15 Minutes

Documents

CHAPTER 13...Tax Act (FIRPTA) • Ensures that withholding taxes from a real estate transaction owned by a foreign person are sufficient • Buyers must withhold 10% of sale amount