Seller guide

WHAT YOU SHOULD KNOW BEFORE YOUR HOME GOES ON THE MARKET

Every seller should go through various steps of preparation before they officially place their home on the market. This will allow you to feel more confident during the entire selling process and when that lucky buyer decides to close on the house, the transaction will be effortless. When a seller is just getting started in the process, they want to make sure they hire an extremely professional and organized real estate agent. Real estate agents can be a great asset if they are chosen carefully. They have high levels of knowledge in the industry and a great real estate agent will have plenty of buyers trying to purchase the home or property of the seller. The real estate agent will let the seller know exactly what they need to do to properly prepare their property for all prospective buyers. They will also make sure the seller’s home is priced to sell and when the buyer requests an offer, the real estate agent will be able to negotiate great counter offers that will greatly benefit the seller. The seller should inform their real estate agent of any time deadlines they would like to meet when selling their home so the real estate agent can properly assist with closing the home before the seller’s deadline. The settlement process that comes along with selling a home can be extremely complex and frustrating if careful attention isn’t paid to every portion of the process. A seller can have a smooth and simple experience when making a sale if they completely understand and carefully follow the steps below.

Make A Great Offer

The seller will initially list their house for a specific price. Once the buyer has time to look over the property, they will make an offer that the real estate agent will then present to the seller. If the seller likes the offer, they can accept it. If the seller doesn’t like the offer, the can give the buyer a counteroffer or just completely reject the offer all together. This can be a long process depending on how long it takes the seller to decide whether or not they want to accept, counter, or completely reject the buyer’s offer.

Initiate Escrow

Once the seller accepts the offer, escrow will be opened so the buyer can then deposit their earnest money to the escrow account. This is the “good faith” money that represents the buyer’s intent to actually purchase the home or property from the seller. This is where the escrow company steps in to handle all of the funds being transferred during this part of the official transaction.

Start the Contingency Period

Within the purchase agreement is a specified time period where the seller has to satisfy any contingencies that the buyer has established. This can mean that the buyer wants to seller to get an appraisal and inspection done on the house. The buyer can also make sure a title search is completed during this time to make sure they will be receiving a clean title when escrow is closed. After the seller completes all the required contingencies, the buyer’s real estate agent will present it to them to review and approve. These documents may be:

• The physical assessment and inspection of the home and property
• The physical assessment and pest inspection of the home and property
• The Real Estate Transfer Disclosure Statement or other official disclosure forms

Complete Escrow

After the buyer and seller are both satisfied that all of the terms and conditions are met by both parties, the seller will give the buyer the closing documents to sign. When the buyer’s lender officially funds the loan that is needed to purchase the home, the transaction is considered to be legally complete. At this point in time, all of the documents within the transactions are recorded in the county records and the ownership of the title is transferred to the buyer. Escrow is now closed and the buyer is the new owner of the home or property.

“California Residential Purchase Agreement and Joint Escrow Instructions”

In the state of California, the standard form titled “California Residential Purchase Agreement and Joint Escrow Instructions” is used. This one document is a combination of both the purchase agreement and escrow document all in one. This offer agreement is for the use of buyers and sellers performing a transaction for a single-family residential property. Within the California standard form are stipulations concerning the following:

• The specifications of the offer itself
• Escrow timeline
• Financial agreement terms
• Escrow and title
• Government requirements
• Inspections and reports
• Statutory disclosures
• Property conditions/defects
• Dispute resolution procedures
• Included/excluded items in the sale
• Broker compensation from the buyer
• All other important specifications and stipulations relevant to the appropriate sale of the property with a clean title and smooth transfer of ownership

Please read through the entire “California Residential Purchase Agreement and Joint Escrow Instructions” to best acquaint yourself with the information.

Escrow is Complete

The buyer, the buyer’s real estate agent, the seller, and the seller’s real estate agent will all produced an agreed upon time period for the escrow. The specifications contained within the purchase agreement will determine if the escrow lasts as short as a few days or as long as a few months. Before the escrow closing can be made final, the following processes need to be completed.

• The closing documents and escrow forms must be signed by all involved parties
• The purchase agreement contingency issues must be resolved and removed
• The closing costs required for escrow must be successfully deposited by the buyer, seller, and lender
• Records must be made for the transaction documents in the county of California where the buyer will reside
• The escrow company must accurately distribute all necessary funds to the appropriate parties

Once all the required transaction documents are required, this proves the official transfer of title ownership has been completed. This means the escrow is closed and the buyer is able to begin living in their new home.

WHAT TO DO WHEN YOU’RE IN ESCROW

The escrow time period is the perfect time for buyers to get all of the proper documentation in order to feel confident in their new home purchase. There are a few major steps every buyer must go through when they’re in escrow.

1. Purchase Agreement

• The Purchase Agreement is given to the escrow company in order for them to review and approve it.

2. Buyer’s Deposit

• The buyer submits their closing deposit to the escrow company. This amount is previously agreed upon when the buyer chooser the lender they would like to receive their home loan from. If the buyer is using cash, they don’t need to receive a loan.

3. Preliminary Report

• The title company issues a preliminary report to all parties so they understand the title defects that exist before closing. This way all of these issues can be resolved before the closing is made official.

4. Escrow Document Preparation

• The documents needed to lay out the escrow instructions are prepared and given to all parties. This preparation process varies depending on the escrow company in California the buyer uses.

5. Principal Signatures

• All principal signatures are collected from the buyers and sellers. This includes the Statements of Information from the sellers and any other underlying loan payoffs that need to be completed if the buyer needs a loan.

6. Submit Demand Requests

• Demand requests are now submitted and received.

7. Payoff Data Entries

• Any payoffs or commissions being received by the parties involved will be recorded.

8. Financing

• Financing is only required if the buyer needs a financial loan from a lender to purchase their house. The lender must first approve that the buyer is eligible to receive a loan from them. After the buyer signs and agrees to the documents they receive from their lender, then the buyer can use the loan to make their new purchase. If the buyer is using cash to purchase their home, they don’t need to worry about paying interests on a loan.

9. Closing Statement Preparation

• The escrow company will then prepare all the closing statements for the buyer and seller to review. Once these statements are approved, the escrow process can continue. For the closing costs, the buyer usually pays for everything such as the attorney feeds, loan origination feels, credit report fees, appraisal fees, survey fees, inspection, fees, and any other expenses that were needed to solidify the transaction. On the other hand, the seller usually pays for the transfer taxes, recording fees, prorated taxes, HOA dues, title insurance premiums, and home warranty premiums. The specifications of this cost distribution are laid out in the previously signed purchase agreement.

10. Buyer’s Signing Appointment

• The buyer will then schedule an appointment to sign all the necessary documents prepared by the escrow company. Additional escrow paperwork can be added here and then the buyer can make another appointment with the seller if they so choose.

11. Request for Funds

• If the buyer can’t use cash and they are using a loan, the lender will request the funds at this time. The buyer will deposit an agreed upon amount of money. This amount is usually determined during the initial process when the buyer is choosing a lender to receive a loan from. On the other hand, the seller will provide a deed, if applicable.

12. California County Records

• Once all the correct funds are received, the documents must be recorded in the county of California where the buyer will soon be living. The escrow company ensures that all the proper transactional documents are established in the county records.

13. Confirmation of Records

• The appropriate county confirms they have recorded all documents they received from the escrow company.

14. Fund Disbursements

• Every party receives the correct amount of money or property they agreed to. At this point, the closing packages are finalized and released. The buyer is now officially the owner of that home and they have all legal title rights to the property.

4. Homeowners Exemption

If a home has been owned or occupied starting on March 1^st of the year 2021, a homeowner’s exemption of $7,000 can be received according to the assessed value of the property. The homeowner must file for the exemption between January 1^st and February 15^th. This exemption will stay in place until the owner of the property formally terminates it themselves. At which time the homeowner must inform the accessor that the property is no longer eligible for the exemption. A 25% penalty along with assessment interest may be given to the homeowner if they fail to inform the accessor of these changes.

5. Documentary Transfer Tax

Within the state of California, a specific county or city is able to adopt a documentary transfer tax that can be applied to the transfer of any properties that are located in the state. The total price that was paid for the property is utilized to calculate this tax excluding any loans that were assumed. The computation is completed at a $0.55 rate for every $500 of total or fractional consideration.

6. Income Tax

The real estate agent of a buyer is not responsible for providing their client legal advice or information about the specific taxes the client must pay for their new property. There are various situations where the buyer should just reference CPA to understand everything they need to know about the income taxes that will personally affect their new residence. Each potential sale will have its own tax requirements and implications that the buyer should always be aware of.

GETTING TO KNOW THE TAX CALENDAR

Fully understanding the tax calendar includes a deep knowledge of the fiscal year. The California state property tax fiscal year officially begins on July 1^st. Homeowners receive a notice of the assessed value of their home by the end of July. Then, the official bill is mailed to them the week of October 1^st. Property owners are permitted to pay their property taxes in two equal installments.

Payments on Property Tax Are Based on The Fiscal Year

The property tax fiscal year officially begins on July 1^st in the state of California. All homeowners will get a notice containing the assessed value of their home no later than the end of July. Then, the official bill is mailed to them during the week of October 1^st. Every single property owner has the right to pay their property taxes in two equal installments.

When a seller places their home up for sale, the tax is usually prepaid. Within the closing statement, the buyer may owe some portion of the tax as well. Once the property is officially transferred, the new owner is completely responsible for paying the property tax. There is a specific tax and impound schedule that all homeowners must abide by in the state of California.

TAX RATES FOR CAPITAL GAIN

The tax rate continues to increase for existing homeowners and people looking to sell or buy their first home in the state of California. If a buyer makes enough money to pay for the general cost of the home but not the additional taxes, then there will be no sale. Fortunately, with the tax code provisions made within IRC Section 1031, there are various tax deferral that taxpayers can take advantage of. There are four specific ways in which a taxpayer could potentially be taxed whenever an investment property is being sold if they pay no mind to the 1031 exchange.

Depreciation Recapture

This is the amount of money that is gained when a homeowner sells their house that contains any form of depreciable capital. In order for the seller to be properly taxed, this depreciable capital has to be reported as a form of “ordinary income”. The depreciation recapture must be appropriately assessed whenever a homeowner sells their house at a price that is higher than the actual tax basis it is assigned due to the adjustments made for the cost after depreciation. In California, taxpayers are taxed 25% for the total value of the depreciation recapture.

Capital Gains for Federal Taxes

Federal capital gains taxes are owed by all taxpayers for the total value of any remaining economic gain. This value depends on their taxable income. If single filing taxpayers get paid more than $434,550 and married couples get paid more than $488,850 in taxable income, then they will have a 20% capital gain tax. If taxpayers receive annual income that is below this value, they will only have a 15% capital gain tax.

Net Investment Income Tax

This tax is aligned with the requirements set forth by IRC Section 1411. If the situation demands it, a 3.8% surtax is applied to the taxpayers who have a net investment income above the threshold amounts. The threshold for single filers is $200,000 and the threshold for married couples is $250,000. IRC section 1411 defines net investment income as any dividends, capital gains, interests, incomes from partnerships, or retirement incomes.

California State Taxes

There are always state taxes added on top of the other taxes listed above. The combination of all four tax classifications defines the total amount the taxpayer owes.

The section 1031 exchange provides a great tax advantage for real estate investors so they can hold real property that they want to invest in. This allows them to defer taxes on the property they would have otherwise paid when they sold the investment property.

FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT

The overall purpose for the creation of this act was to enforce taxes on the foreign persons who were using real-property interests in the United States to sell and make profit. People who buy real-property interests from foreign sellers are not allowed to enforce taxes on them when the property is being sold. The withholding of taxes by the buyer that occurs during this process is associated with a prepayment of the anticipated amount of taxes the seller is going to have to pay to the IRS. The IRS has specific tax specifications for foreign persons selling within the United States.

Non-Primary Residence for The Buyer

If the foreign persons are selling property to a buyer who will not be using the property as their home of residence according to the Internal Revenue Code, then there is a 15% withholding rate applied no matter the selling price point of the property.

Primary Residence for The Buyer

If the foreign persons are selling property to a buyer who will use the property as their primary home of residence according to the Internal Revenue Code, a 15% withholding rate is applied if the full sale price is equal to or greater than $1 million. If the full sale price of the property is less than $1 million but greater than $300,000, then a 10% withholding price is applied. If the full sale price is equal to or less than $300,000, then a 0% withholding price is applied.

Los Angeles Transfer Taxes

There is a documentary transfer tax specifically placed on any documents that are associated with real property in Los Angeles County. This tax is officially calculated through the understanding of what the value of the property in question truly is when it exceeds $100 at a $0.55 rate for every $500. This excludes ay liens that may be on the property during the official time of sale. On behalf of each individual city, this tax is collected by the Recorder’s Office.

The follow specifications are required for Los Angeles County as described by the table below: