Q-Last month we completed the purchase of our first home. Although there were a few hitches, we had a wonderful realty agent who solved several problems which occurred at the last minute.
My question involves which closing costs will be tax deductible on our 1994 income tax returns. We paid a mortgage loan fee, fire insurance premium, property tax pro-ration, prepaid interest, attorney fee, escrow fee, notary and recording fees, documentation fees and advance payment to property tax and fire insurance escrow impound account.
A-Be sure to save your closing papers and keep them with your income tax records. This may be the only record you have of your residence closing expenses.
The loan fee paid to obtain your home acquisition mortgage qualifies as an itemized interest deduction, as does your prepaid interest for the remainder of the month you bought your home. Your pro-rated share of the property tax is also an itemized tax deduction. However, your other closing costs are not tax deductible.
The fire insurance premium is a personal, non-deductible expense. The advance property tax and fire insurance payments to your escrow impound account are not immediately deductible, but the property tax will eventually become deductible when remitted to the local tax collector by your loan servicer. This will be reported to you on your year-end mortgage payment accounting statement.
The other closing costs for attorney fee, escrow fee, notary and recording fees, and documentation fee are not tax deductible. But they should be added to your home’s purchase price to arrive at its adjusted cost basis. When you eventually sell your home, this adjusted cost basis becomes important, so save your closing statement forever.
Q-The foundation of our home is cracking. A contractor estimates he can repair it for $7,850. Can we deduct this expense on our income tax returns?
A-If you can prove the damage was sudden, unusual or unexpected, and if the repair expense exceeds 10 percent plus $100 of your annual adjusted gross income, then, except for the first 10 percent plus $100, the damage qualifies as a casualty loss. Examples include damage caused by flood, fire, hail, earthquake, hurricane, etc.
Be sure to document your damage very carefully with photos and other evidence. If the IRS audits your casualty loss deduction (and this is a favorite IRS audit target) you must prove the loss did not occur gradually over a period of time. If it did, then it’s not a casualty loss and is not tax deductible. Please consult your tax advisor for details.
Q-We bought our home in the first phase of a large-scale subdivision started about four years ago. All went well until about 1990 when home sales slowed down. The developer then decided to change phase two by building smaller, cheaper houses priced at about $20,000 less than we paid for our home.
In each subsequent phase, the developer has constructed smaller, less-desirable homes on smaller lots. As a result, the resale prices of homes in our section have fallen below what we paid over four years ago. Do we have any recourse against the developer for causing our loss in market value?
A-The answer depends on what representations were made by the developer to you and if you can prove those representations were false. Your situation is not uncommon.
But I am unaware of any homeowners who have successfully sued their developer for damages caused by down-sizing subsequent phases of their subdivision development. Please consult a local real estate attorney for further details.
Q-When we asked our Realtor the square footage of a home she was showing us she said it was about 2,400 square feet. As you often suggest, before we made our purchase offer we asked her to prepare a CMA (competitive market analysis) which she reluctantly did.
After studying the CMA, we made our purchase offer at $75 per square foot, which was about $17,000 less than the asking price. We haggled over some terms, but the seller accepted our offer. The sale closed in August.
However, when our insurance agent came out to measure and photograph the house, she said there are only about 2,150 square feet. The lender’s appraisal says 2,172 square feet.
When we brought this to the attention of the seller and the Realtor, we were told in effect, “If you don’t want the house, don’t buy it, but we said the 2,400 square feet was approximate.”
Since we got a house with at least 228 less square feet than we thought we were buying, at $75 per square foot, that’s $17,100 we overpaid. What should we do?
A-If you had discovered the discrepancy after the close of the sale, you might have valid grounds for a lawsuit to either rescind the sale or recover damages for fraud or misrepresentation.
However, you discovered the problem before the sale closed and had adequate opportunity to cancel the purchase, but went ahead anyway.
There is only one precedent court decision of which I am aware allowing recovery in such a situation. It is the 1994 California decision in Jue vs. Smiser, 23 Cal.App.4th 312, 28 Cal.Rptr.2d 242, which said a home buyer who proceeded with a purchase, after learning about a possible misrepresentation, could recover damages.
If you decide to proceed, your key problems are proving the seller and/or Realtor knowingly misrepresented the home’s size and recovering any damages since you went ahead with the purchase anyway.
Another difficulty is, unless you can find a lawyer willing to take your case on a contingency, the costs of the lawsuit could easily exceed any possible recovery. By all means, consult an attorney, but I think you would be best off forgetting the matter.
Q-Our purchase offer to buy a home was accepted by the seller after about a week of negotiation. But after we applied for a mortgage and it was approved, my husband and I both realized we really don’t want to buy this house.
It is located far from our jobs and would involve a commute of almost one hour each way. There’s nothing wrong with the house but its location isn’t right for us.
How can we get out of this purchase? We told the sellers and the Realtor, but they refuse to refund our $10,000 earnest money deposit.
A-If you fail to complete the home purchase, you are liable for damages to the seller. However, if the seller can sell the house to another buyer without suffering any damages, such as a lower sales price, then the seller would not have any damages.
Read your purchase contract. What does it say about breach of contract damages? Some say the seller is entitled to retain all or part of your deposit as liquidated or agreed damages. If your contract does not contain a liquidated damages clause, then the seller must prove actual damages due to your breach of contract.
Your situation shows many buyers like you think they can just cancel a home purchase contract and easily get their deposit back. That’s not correct. You shouldn’t have made your purchase offer unless you intended to complete the purchase as agreed.
Consult your attorney, but don’t expect to see that $10,000 anytime soon. In the future, don’t enter into any purchase unless you intend to live up to your side of the contract.
———-
Please note: Real estate laws differ from place to place, and laws of your area should be checked before making decisions on real estate problems. Letters should be addressed to Tribune Real Estate Features Service, P.O. Box 280038, San Francisco, Calif. 94128.
