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Monday, October 26, 2009
Purchase agreement not same as actual closing
By James Hamill
For the Journal
Q: I have a question on the first-time homebuyer credit. I want to purchase a home that will qualify for the $8,000 credit but I have not signed a contract yet and my Realtor tells me that the sale must close by Nov. 30 unless Congress decides to extend the credit. I am told it will be difficult to close by Nov. 30. Will I be able to get the credit if I sign a purchase agreement now and the closing cannot be done by Nov. 30?
A: The first-time homebuyer credit requires that the home be "purchased" by Nov. 30, 2009. That much is clear.
The term "purchase" is not defined by the tax law. The credit is claimed by filing Form 5405. This form asks for the date the home was "acquired" and the instructions explain that the date acquired is the date purchased.
I believe it is clear that simply signing a purchase agreement creates something less than a "purchase." Such an agreement is an executory contract, that is, one under execution in which you still have deeds to perform to complete the purchase. A closing would provide evidence that a purchase has occurred.
It may well be difficult to close a purchase by Nov. 30 when you will obtain a mortgage for part of the purchase cost. But if a seller is willing to finance the purchase, perhaps with a real estate contract, you can "close" much earlier than if you borrow from a financial institution. A real estate contract does not convey immediate title to the property because you need to perform the requirements of the contract before title passes.
Nonetheless, the tax law will almost always treat possession of property under a real estate contract as a purchase. This is because the tax law looks to "benefits and burdens of ownership" rather than just legal title when determining who owns property.
So a "conventional" purchase, with a note and mortgage, will be difficult to qualify by Nov. 30, but a real estate contract should be able to meet the deadline.
Q: I became engaged in August and have a wedding scheduled for May 2010. I purchased an engagement ring for $22,000 and gave it to my fiancée in August. I have a friend with an accounting degree who tells me that I made a gift and I need to file a gift tax return because it is for more than $13,000. He had one tax class and I don't believe him. Can you clarify this?
A: The tax law defines a gift as a transfer "for less than full and adequate consideration in money or money's worth." The gift tax exists to support the estate tax, so that someone cannot avoid the estate tax by giving assets away right before death.
For this reason, the gift tax applies unless the donor receives something of equivalent value in a monetary sense – to do so would mean the donor's estate was not reduced and that there was no reason to impose the gift tax.
It is clear that a transfer motivated by love and affection, or a promise to marry, is not consideration in money or money's worth.
So if you give something worth $22,000 in exchange for a promise to marry, you have diminished your estate and have made a $22,000 gift.
But we're not done yet, because perhaps you have not given anything yet. Some states treat an engagement ring as a transfer for a promise to marry. Some treat it as a transfer conditional on the marriage actually taking place.
There have been lawsuits seeking return of a ring when an engagement has broken off and states differ as to whether the ring must be returned. If the ring is a conditional transfer, then a completed gift has not occurred until the conditions (the marriage) have been satisfied.
I have no idea what our state says about engagement rings – that's a question for an attorney. But if the transfer is conditioned on performance of the marriage, you have not made a gift until the marriage occurs. t that time, the donee is your wife and gifts to spouses are exempt from the gift tax.
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