Backup offers can still qualify for first-time buyer tax credit

Home Sale Hindsight

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted May. 14, 2010

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Home Sale Hindsight

Tara-Nicholle Nelson
Inman News

Q: Could a backup offer, submitted prior to April 30, be considered a binding contract, for purposes of qualifying for the first-time homebuyer tax credit, even if it's not formally in contract until after the deadline?

A: I know so many buyers who worked for months to get into contract in time to qualify for the 2010 first-time homebuyer credit. For some, it was meant to be, and for others, it wasn't -- and many wise homebuyers decided they would not feel pressured into buying if the "right" home hadn't yet come along or bidding more than they would have otherwise, because of the urgency created by the credit deadline.

Your question, though, brings up an interesting hindsight scenario: Looking backwards, if you were in backup position to buy a home, and got into that position before April 30, does that qualify you for the homebuyer credit? The answer in any particular scenario depends heavily upon the language of the contract, which varies by state and even by city.

But, in general, the answer is yes -- it is possible that a backup contract could qualify you for the first-time buyer credit: as long as it was actually executed by the seller on or before April 30.

From the IRS website: "The Worker, Homeownership, and Business Assistance Act of 2009 extends the deadline for qualifying home purchases from Nov. 30, 2009, to April 30, 2010. Additionally, if a buyer enters into a binding contract by April 30, 2010, the buyer has until June 30, 2010, to settle on the purchase."

So, the critical verbiage here is "a binding contract."

Under the form with which I am the most experienced, the California Association of Realtors form contracts and addenda, a backup offer is essentially a contract that is binding, but contingent on the release of the first-place buyer's contract.

So, for example, a seller gets two offers, and might sign one, making that the contract, and that buyer can begin inspections, appraisal and their contingency periods. However, if the other buyer agrees to go into backup position, the seller might also sign the second-place offer, creating a binding contract with the second-place, or backup, buyer.

However, the seller and the second buyer would then execute a "backup" addendum, which specifies that the backup contract is "contingent upon written cancellation of any prior contracts and related escrows between (the) seller and other buyers."

Under this language, a backup contract -- though contingent -- is still a binding contract. If the first-place offer falls apart, the sellers are obligated to come to the backup buyer and sell to them the terms of that backup offer/contract, rather than having the ability to put the place back on the market to see if they can get a better deal.

While there is no specific guideline for this in the IRS documentation about the tax credit that I could find, the concept of the time gap between the April 30 contract deadline and the June 30 closing deadline indicates that the tax agency anticipated that there would be loan, inspection, appraisal, short sale and other contingencies that would need some time to be satisfied.

There's a very strong argument that a contingency upon prior contracts is no different in any material respect from these other contingencies. Nothing about this defies the purpose of the tax credit contract deadline -- especially considering that the transaction would still have to close escrow by June 30 to qualify the buyer for the credit.

Again, the specific verbiage of the backup offer is key -- definitely run this past your own real estate broker, attorney and accountant before you make your own personal real estate and tax decisions.

And, to reiterate, for a backup offer to "qualify" for the tax credit it would have to be a backup offer that was signed by both buyer and seller, formally creating a binding, contingent contract by April 30 -- not just submitted to the seller for consideration by April 30 without the seller's acceptance.

Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.

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