Short Sale Contracts and the First-time Homebuyer Tax Credit Expiration:
NOTE: The following is being offered as discussion guidance only and in no way shape or form is ACAR offering legal advice. You should consult with your broker and legal counsel as necessary.
As the final hours tick away before the home buyer tax credit expires, there is a growing urgency to understand one of the key terms in the provisions. What exactly is a “binding contract” as it pertains to the buyer?
Part 1 of IRS From 5405; Section C states: “If the date purchased is after April 30, 2010, and before July 1, 2010, did you enter into a binding contract before May 1, 2010, to purchase the home before July 1, 2010?” The only way to continue is to answer “Yes”.
The question becomes more difficult in a short sale transaction. When is a buyer (to whom the question applies) “bound”? Is it when the seller accepts their offer? Is it when the third party lien holder approves? Is it something else?
A buyer must have entered into a binding contract before May 1st 2010 in order to apply to the IRS for the first-time homebuyer tax credit. Although there is no specific IRS guidance document, ACAR has solicited several legal opinions to offer guidance to our members.
Question – What represents a “binding contract” for the purposes of a buyer claiming the tax credit?
The following is a response from John Jameson, an attorney with Risch Pisca LLC, responding to this issue on the Legal Hotline (a service offered by the Idaho Association of REALTORS®
“Black’s Law Dictionary defines a “binding contract” as, “An agreement between two or more parties creating obligations that are enforceable or otherwise recognizable at law.” Although contracts for a short sale generally contain a third party approval contingency, it is still an agreement between the buyer and the seller that is recognizable at law. As in all purchase and sale agreements, once the contingencies have been met, the parties are bound by the terms that were mutually agreed upon. However, the contingencies of a contract do not affect the binding nature of the contract. Therefore, buyers who have entered into a short sale contract have entered into a binding purchase and sale agreement.”
In a short sale transaction, does a contract between the seller and the buyer require third party approval in order to be considered a “binding contract”?
The following is a response from Charles A. Kasky, RCE Vice President of Legal Affairs, Maryland Association of REALTORS®
“The specific question is whether the existence of a contingency makes the contract not binding. There is some precedent in IRS regulations to the effect that a contract is binding even if subject to a condition, as long as the condition is not within the control of either party.
The example given is: “The taxpayer’s obligation to purchase an interest in the partnership was contingent on other persons signing subscription agreements by a particular date to acquire a minimum number of the total interests offered for sale. If the taxpayer acquires an interest in the partnership, such interest will be treated as acquired pursuant to a written binding contract to which the taxpayer was a party. Although the taxpayer’s obligation to acquire an interest in the partnership was subject to a contingency, the contingency was not within the taxpayer’s control.”
In my opinion, a third party approval contingency is clearly not within the parties’ control, so that should be considered binding. I also believe the same can be said of a financing contingency or even an appraisal contingency.”
The following is a response from Ralph W. Holmen, Associate General Counsel, National Association of REALTORS®
“Most people I’ve talked to agree, as do I, that normal contingencies (financing, inspections) that do not give the buyer or seller complete discretion to terminate the contract should not cause a contract to be considered non-binding for this purpose.”
For specific questions we encourage you to consult a tax expert to confirm buyers are indeed entitled to claim the First-Time Homebuyer Credit. And don’t forget; IHFA is still offering the First-Time Homebuyer Advance Loan where The REALTORS® Community Foundation will pay off the interest and fees on the loans paid off by the due date.