Avoid the DC recapture tax 'surprise'

If you are an agent listing a property for a decedent’s estate/personal representative in DC, help your client and the prospective purchaser avoid a potential big surprise – the real property recapture tax.

DC Office of Tax and Revenue has recently been imposing a recapture tax against properties that were receiving senior citizen tax relief but ineligible due to the property owner’s death – i.e., a change in eligibility.

That is, upon the death of the owner, the personal representative for the estate would be responsible for notifying DC, within 30 days, that the property is no longer eligible for the benefit.

Since it’s unlikely the personal representative is aware of this requirement, the property continues to unjustly receive the benefit until such time as the property is sold.

Once the property is conveyed, DCOTR is notified by DCROD of the change in status and retroactively applies the proper tax status from the date of death through the date of conveyance. This often results in a hefty recapture tax amount then applied against the real property tax account.

As the settlement company, we are being proactive in our efforts to notify DC prior to closing and obtain the recapture tax amount such that it can be handled prior to or at the time of closing.

In some cases, due to timing, this is not possible and the purchasers are left with a recapture tax incurred by the decedent’s estate.

We advise all agents listing a property for a decedent’s estate to be aware of this issue, check the tax status to determine whether it is unjustly receiving the senior citizen tax relief benefit, and make the personal representative aware of the requirement to notify DC of the status change and be prepared to pay a recapture tax.

Split closings are (almost) never a good idea

The other day I handled a split closing – the buyer used Federal Title & Escrow Company and the seller used another title company – and things did not go so smoothly.

A closing already has many different parties involved: buyers, sellers, buyer’s agent, seller’s agent, loan officer.

But two title companies?

For a closing in the DC metro area, it just doesn’t make sense to complicate the transaction further by adding a superfluous second company.

Superfluous? Yes, that’s right, because the "seller’s title company" is going to perform the exact same tasks that the "buyer’s title company" would have performed, and almost certainly at a higher cost.

Since the "buyer’s title company" is responsible for sending out the payoff and issuing the title insurance, and consequently responsible for either releasing the mortgage lien on the property or following up to make sure it is released, most of the main functions will be handled by the buyer’s title company.

Really, all the seller’s title company will do is order a payoff (maybe), prepare the deed (maybe), and handle the closing for the seller, which is typically ten pages or less.

Despite having such a small role, the seller’s title company charges higher fees. They have to; they are handling virtually no major functions and are not issuing the title insurance and the only way to make it worth the title company’s time is to charge the seller a significant fee.

Here is a look at the closing fees from the last three closings in our office for which the seller chose to use another title company:

Closing Date Seller's Closing Fees if Seller Used FTE Seller's Closing Fees Since They Chose Another Title Company Additional Cost by Choosing to "Split" the Closing
March 2014 $435 $705 + $270
February 2014 $435 $675 + $240
January 2014 $435 $770 + $335

So if the seller is paying so much more, it must mean that the seller is being provided with better service, right? Wrong.

By adding a second title company you now have your classic "too many cooks in the kitchen" scenario.
Only one of the three closings above went smoothly, the other two had issues. Think about it, when has hiring more lawyers made for a smoother transaction?

So if it costs more to split the closing, and the service is not better (and often worse), why do people do it?

Well, most of the time, sellers don’t realize how much more it is costing them. That is why I strongly urge sellers to obtain quotes and make sure that it makes sense. 

We've posted a seller's fee schedule on our website. Unfortunately, since most title companies do not post their fees, you will have to call or email them – and shouldn’t the lack of transparency make you suspicious?

DC Council passes the Senior Citizen Real Property Tax Relief Act of 2013

Ten members of the Council of the District of Columbia voted for and passed the "Senior Citizen Real Property Tax Relief Act of 2013" earlier this week. The bill will now be submitted to DC Mayor Gray for his signature.

If it passes, it will provide a significant savings to seniors who own property and have lived in DC for a significant time by exempting seniors who qualify from having to pay any property taxes on their residence. In order to qualify the resident must:

  • Be at least 70 years of age,
  • Have maintained DC residency for at least 20 years,
  • Have a household adjusted gross income of less than $60,000, and
  • Maintain total assets of $250,000 or less, excluding the residence

We will have updated information once the bill has been either signed or vetoed by the mayor.

UPDATE: Mayor Vince Gray signed the "Senior Citizen Real Property Tax Relief Act of 2013" into law on March 25, 2014.

DC increases Homestead Deduction for second straight year

For the second straight year, the DC Office of Tax and Revenue increased the Homestead Deduction benefit from $69,100 to $70,200 for those DC residents who own and occupy their property as their principal residence. This results in an annual property tax bill reduction of $596.70.

Per the DC Office of Tax and Revenue, in order to qualify for the deduction, the homeowners must:

  • Submit an application with the Office of Tax and Revenue;
  • Occupy the property, and the property must not contain more than 5 dwelling units (including the unit occupied by the owner); and
  • Use the property as their principal residence

If the DC property owner files an application and it is approved by the Office of Tax and Revenue between October 1 and March 31, the benefit will be granted to the homeowner for the entire tax year and all future tax years.

If the application is filed and approved between April 1 and September 30, the benefit will be granted for the second half tax bill of that year and all future tax years.

You can complete the new form online, or visit the Office of Tax and Revenue’s Homestead Deduction website link for additional information.

A wake-up call from CFPB regarding Marketing Service Agreements

If you are an agent, broker, or mortgage lender who has been solicited by a title company to enter into a Marketing Service Agreement (MSA), you would probably be best served to avoid the temptation.

The Consumer Protection Financial Bureau (CFPB) has made it clear that they are actively probing and investigating such arrangements as one of their top priorities. Most recently, an MSA between a top Maryland real estate team and their “partner” title company resulted in a massive class-action lawsuit and, potentially, an enforcement action by the CFPB (see full story here).

Federal Title has actively taken a strong stance against both MSA’s and Affiliated Business Arrangements (ABAs), recognizing that such arrangements only enrich the referral sources at the expense of the consumer and further drive up the costs of title charges. Read our related articles on MSAs and ABAs.
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  • What's title insurance?

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