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.
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.
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.
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:
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.
Once the offer/contract is agreed upon by both the buyer and the seller, official copies of the contract are distributed to the attorneys of both parties. The attorneys are charged with reviewing and approving said contract to ensure their clients are receiving the best deal possible. After this is completed, a professional assessment will be made during the home inspections to ensure the home is satisfactory. If there are any issues found, they will be addressed and negotiated by the buyer and seller. Additionally, if the buyer isn’t using cash, they will apply for a mortgage loan and make a commitment the lender of their choice. During this time, the seller needs to collect all relevant documents such as a survey, paid tax receipts, a title search, and any other legal documents they may have in their possession. This can also include mortgage statements that they will also hand off to their attorney. Their attorney will then update the survey and title search as necessary so they can send this information to the buyer’s attorney for official review. The buyer’s attorney will complete a thorough review of the documents before participating in a title examination.
The preliminary report must be prepared before the title insurance policy is officially issued to represent who the legal owner of a specific piece of land or property is. This also contains any defects or liens on the property that won’t be covered in the following title insurance policy. It’s extremely important that buyers know the difference between the Preliminary Title Report and a Full Chain of Title report. The biggest difference is that the Preliminary Title Report contains the most up to date vesting deed and the Full Chain of Title report incorporates multiple copies of every single transfer copy of the relevant source documents within the past 30 years. The homebuying process would not be fully complete without the preliminary title report. This report decides how in what way the title insurance company will officially issue their title insurance policy. Within this report is the information and contingencies that must be resolved before the title is clear.
Once the title examination is complete, the seller’s attorney and the bank’s attorney will receive the updated title report from the buyer’s attorney. This title report completely outlines all the documents that are needed to officially complete the sale and the buyer’s attorney will receive they documents to review them for a final time before closing occurs. Throughout this entire process, the buyer is also working alongside their lender to make sure their loan will be cleared for closing. As soon as all title defects have been resolved and the title documents are fully examined, the loan should be cleared to close if the buyer isn’t using cash. Once all of these requirements are met, both parties set up an appointment to official close on the property and transfer ownership. To prove their identity, the buyer needs to also sign a Statement of Identity form that is provided to them by the escrow company. This is to ensure the escrow company can distinguish this specific buyer from other people who may have their same name. The Statement of Identity form will keep you from assuming the burden of someone else’s liens or bankruptcies.
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:
Please read through the entire “California Residential Purchase Agreement and Joint Escrow Instructions” to best acquaint yourself with the information.
The escrow providers within the state of California are regulated by five different state agencies. These agencies are the departments of Insurance, Corporations, Banking, Real Estate, and Savings & Loans. Within the entire state, the Department of Corporations officially regulates 1,212 different independent escrow companies. All of the escrow companies that perform these services in the state of California are licensed companies. Buyers never have to worry about receiving professional service when they are buying a house for the first time in California.
An escrow company is extremely important to ensure a smooth buying experience. The escrow company is responsible for:
The escrow company will then receive a deposited down payment from the buyer and the deed from the seller. If the buyer is using cash, they must provide the proper amount of funds for the deposit to the escrow company before closing. The lender will supply the funds for the loan if the buyer is not paying with cash.
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.
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.
There are five major players involved during the escrow process. Each has a unique role to play when it comes to a successful transaction when buying or selling a home. They are listed below.
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.
The property taxes that exist throughout the entire state of California are below the property tax national average. The real estate property is always reassessed every time ownership is transferred from one buyer to another and the property tax is most commonly set at 1%.
1. Property Tax
The amount of taxes a homeowner must pay for their property is an extremely important part of the entire real estate process. Property owners are required to pay annual taxes on their property include both federal and state taxes. These taxes must be paid each time the property is bought, sold, or given away. The stipulations that include who should pay the taxes are usually negotiated between the buyer and seller given the percentage responsibilities may vary.
2. Assessment Tax
Real property taxes are collected by numerous cities and counties to ensure they have enough money to cover their daily operating costs. The county assessor is the person who determines the exact amount each residence must pay for the real property taxes associated with their property. Then, the county collector ensures these taxes are collected. Higher tax rates are associated with more valuable property.
A tax assessment occurs when the Income Tax Department fully analyzes the validity established by the return of income. This entire examination process is considered to be the tax assessment. Under section 144, assessment can also be in reference to a re-assessment or best judgment determination.
Property taxes represent the money you pay according to the assessed market value of your combined property and the property tax rate as well. On the other hand, the tax assessment is the professional evaluation of your property that is completed by either a city or county assessor to officially determine the most up to date market value of the property.
These property taxes are calculated based on the number you get from multiplying the current assessed value of your property by the mill rate. To get the assessed value, you must multiply the market value by the assessment rate.
3. Proposition 13 and Exemptions
Proposition 13 limits the amount of property tax that can be administered in the state of California. In the year 1978, voters in California approved this law. The law limits the amount of money that can be requested for general property taxes to only 1% of the market value of the property in question.
Following the guidelines set forth by Proposition 13 means any transfer of property will cause a reassessment of the property to occur. There are certain situations where exemptions can be made regarding this reassessment.
This authorize the property to be transferred between spouses or their children without a reassessment having to occur.
This states that homeowners can transfer the current taxes placed on their property under Proposition 13 if at least one of the homeowners is 55 years old or older, the replacement property is bought within two years of the original property sale, the new home being purchased is of equal or lesser value than the current property. If within the first year of purchasing the old home the new home is closed, the price of the property can see a 5% increase. On the other hand, if within the second year of purchasing the old home the new home is closed, the price of the property can see a 10% increase in comparison the other selling price of the old home.
4. Homeowners Exemption
If a home has been owned or occupied starting on March 1st 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 1st and February 15th. 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.
For personal residences, homeowners can deduct the following classifications from their annual income taxes: mortgage loan interest, property taxes, and prepayment penalties. Additionally, the person selling the home is eligible to exclude up to $250,000 of any capital gain they receive on the sale of their property. This value is bumped up to $500,000 if the sellers are joined in a legal marriage. The sellers just have to make sure they lived in the home for two out of the last five years to officially qualify for this exemption. Unfortunately, if the seller loses any money through the sale they can’t deduct that from their income taxes.
If people choose to invest in income-producing property, they can deduct all of the follow items from their taxes: mortgage loan interest, property taxes, prepayment penalties, operating expenses, depreciation of improvements. Additionally, a depreciating property must have an even time allocation to represent the depreciation most accurately. This is 27.5 years for apartments and rented homes, and 39 years for commercial buildings. There are numerous facts and specifications that every buyer should make sure they fully understand before making a purchase on a home. Given income taxes play a major role in the homebuying process, every buyer should know what kinds of taxes they will have to pay for their new property once they officially close on the homes.
Within the state of California, the property taxes are dealt with by the local governments within each specific county. Each county has its own individual tax rates that residents must pay which is decided upon based on a certain percentage of your property’s value. Usually, the local government use these property taxes to fund various county functions. This can include services to local schools and infrastructures throughout the community. The payment for a property tax occurs two times a year, using a fiscal year as the official reference.
Fully understanding the tax calendar includes a deep knowledge of the fiscal year. The California state property tax fiscal year officially begins on July 1st. 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 1st. Property owners are permitted to pay their property taxes in two equal installments.
The property tax fiscal year officially begins on July 1st 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 1st. 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.
This occurs from July 1st through December 31st (standard loans require a 2-month addition).
July 1st: This date marks the beginning of the fiscal year.
October: The tax bills are mailed during the last week of October.
November 1st: First payment installation is due.
December 10th: If the first payment hasn’t been received by this date, it’s considered delinquent.
This occurs from January 1st through June 30th (government loans require a 4 month addition).
February 1st: The second payment installation is due.
March 1st: The marks the official assessment date.
April 10: If the second payment hasn’t been received, it’s considered delinquent.
A supplemental tax is administered on top of the original property tax when the ownership of a property changes hands. The County Assessor appraised the full cash value of the property that’s changing ownership. The supplemental tax and property tax are both determined by assessments that are made based on the market value of the property. This supplemental assessment can determine if there needs to be an increase or decreased in the previously assessed property tax value before the new homebuyer acquires ownership of the property. The new homeowner is responsible for paying the supplemental tax bill that is sent to the recorded mailing address. Once the new homeowner makes the payment, they will provide official proof of this to the lender.
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.
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.
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.
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.
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.
|Single Payer||Joint Claim (Married)||Tax for Capital Gain||Surtax NIIT** (Section 1411)||Tax Rate (Combined)|
|$0 to $39,375||$0 to $78,750||0%||0%||0%|
|$39,376 to $200,000||$78,751 to $250,000||15%||0%||15%|
|$200,001 to $434,550||$250,001 to $488,850||15%||3.8%||18.8%|
** Only for net investment income does the 3.8% NITT Surtax apply.
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.
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.
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.
Each individual county located in California has its own set of costs concerning escrow, titles, and the transfer of official documents. All of these categories require specific levels of payment that the buyer or seller pays depending on the county.
These charges are either completely paid by the buyer, completely paid by the seller, or split evenly between the two parties.
Similar to the escrow charges, these fees are either completely paid by the buyer, completely paid by the seller, or split evenly between the two parties. Sometimes, the buyer will pay this money directly to the bank or institution that is lending them the money for them to purchase the home.
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:
|City||City Code||Tax Rate|
|Culver City (Prior 4/1/21)||20||$4.50 (per $1,000)|
|Culver City (Effective 4/1/2021)||20||0.45% on amounts of $1,499,999 or less
1.5% on amounts from $1,500,000 to $2,999,999
3% on amounts from $3,000,000 to $9,999,999
4% on amounts $10,000,000 and above
|Los Angeles||44||$4.50 (per $1,000)|
|Pomona||57||$2.20 (per $1,000)|
|Redondo Beach||59||$2.20 (per $1,000)|
|Santa Monica (prior to 03/01/2021)||68||$3.00 (per $1,000)|
|Santa Monica (effective 03/01/2021)||68||$3.00 (per $1,000) on amounts of $4,999,999 or less
$6.00 (per $1,000) on amounts of $5,000,000 and above