Note: For those unfamiliar with the DC Tax Abatement program or in need of a refresher, Federal Title & Escrow covers the basics of the program in the following blog post - How to Qualify for the DC Tax Abatement Program. As always, you can find the most up-to-date Tax Abatement Application on the Office of Tax and Revenue’s website.
I recently had a question from one of our agents regarding the income threshold for the DC Tax Abatement Program. The question was prompted because the buyer’s salary was below the income limit; however, the buyer planned to liquidate assets (specifically stocks) in order to make the down payment. The issue boiled down to this - how would the liquidation of assets affect qualifying income for the DC Tax Abatement Program?
The answer is relatively straightforward. Part III of the Tax Abatement application requires that an applicant disclose his or her household gross income. This includes but is not limited to the following:
(a) wages and salary,
(b) dividends & interest,
(c) business income,
(d) pensions & annuities,
(e) capital gains & profits,
(g) social security,
(h) unemployment insurance and/or workman’s compensation,
(i) support money and/or public assistance grants,
(j) sick pay excluded from home,
(k) military compensation,
(l) fellowship awards and grants,
(m) life insurance proceeds,
(n) veteran’s pension and disability benefits,
(o) GI bill benefits,
(p) loss time insurance,
(q) income subject to Unincorporated Business Tax,
(r) cash distributions, and
(s) other [the District’s catchall].
In the aforementioned situation, the liquidation of assets – specifically the capital gains/profits from those assets – would have counted towards the buyer’s gross income and resulted in the buyer’s disqualification from the DC Tax Abatement program.
Interestingly, the timing of the liquidation of assets matters less than you may suspect. The tax abatement program instills a duty to report when a homebuyer ceases to qualify for the program. If the homebuyer liquidates assets after the initial application – thereby increasing his or her household gross income over the threshold, the homeowner must alert DC as to the disqualification. The Office of Tax and Revenue’s Special Programs Unit audits every application every year, and a homeowner who improperly avails themselves of the program potentially faces removal from the tax abatement program, recoupment of real property taxes with penalties and interest, and recoupment of the previously exempted transfer and recordation taxes.
Fortunately, our buyer was able secure additional financing and avoid potential disqualification since the issue addressed in a timely manner.
If you have any questions regarding the calculation of gross income for the DC Tax Abatement application, contact us! Federal Title & Escrow is here to help you throughout the settlement process – including any potential questions with the DC Tax Abatement application.
For Immediate Release
Main Line: 202.362.1500
Federal Title & Escrow Company Partners with eClosing Provider Pavaso to serve Washington, D.C., Maryland, and Northern Virginia Settlements
Washington, D.C., December 22, 2017 – Federal Title and Escrow Company has partnered with eClosing service provider Pavaso to bring cutting-edge technology to real estate settlements in the Washington D.C., Maryland, and Virginia area. Pavaso created the industry’s only end-to-end digital closing platform to improve communication, efficiency, and process management in the real estate settlement arena and is continuing to focus on the improvement of the consumer experience.
Federal Title and Escrow Company’s main initiative is to be at the forefront of innovation to make the closing process simpler and smarter for the consumer. We are constantly striving to utilize technology to streamline the closing process without sacrificing the personal relationship we build with our clients. The real estate settlement market has been rapidly moving toward online closings. Pavaso provides us with a secure platform to link all parties in the transaction so that we may conduct both hybrid and fully online closings.
Pavaso’s technology empowers lenders and title companies to deliver the speed and ease of a modern transaction without neglecting the human touch. As today’s consumers increasingly demand the simplicity and convenience of an online transaction, Pavaso is bridging the gap between the archaic paper mortgage process and the digital world. Its technology is both flexible and “future-proof,” enabling users to conduct digital transactions ranging from hybrid closings to complete eNotes.
“The D.C. metropolitan area consists of millions of hardworking individuals that may not have the time for the traditional settlement,” said Todd Ewing, CEO, Federal Title and Escrow Company. “Pavaso allows the consumer to review documents, sign, and securely complete closing from their own preferred venue.”
“We pledge to provide the best experience for the consumer and seek to refine and continually improve the end to end borrower experience,” added Mark McElroy, CEO, Pavaso. “Each and every day closings are happening across the country with consumers who don't fully understand the process and there is less room today for a cumbersome, inconvenient experience. Consumers have choices now and want a better experience. By moving to a digital closing process, Federal Title is providing that experience, allowing borrowers to benefit from a significantly more informed, transparent and convenient process.”
About Federal Title & Escrow Company
Established in 1996, Federal Title & Escrow Company, the largest independently owned and operated title company in Washington, D.C., is known for its top-notch customer service and streamlined closing process. Federal Title has D.C. office locations in Friendship Heights and in Logan Circle. For more information, please visit www.federaltitle.com or contact Nikki Lyon directly for media inquiries.
Texas-based Pavaso is transforming the mortgage process with radically innovative digital mortgage closing technology facilitating fast, consistent, accurate and compliant closings every time. Pavaso offers a single, collaborative, secure portal promoting transparency, efficiency, consumer education and communication in a seamless format delivering value to every stakeholder involved in the transaction. For more information on how you can streamline your process and digitally transform your organization, call us at 866.288.7051 or visit www.pavaso.com.
Understanding the property tax assessment process can be a bit tricky. Specifically, it can be difficult to understand the difference between an assessed value and a taxable assessed value. Part of the confusion has to do with the Assessment Cap Credit. Here is an example of a recent question on this topic:
Question: On my DC Tax bill, the assessed value is listed as $388,500, but my taxable assessment was only $291,200, a difference of $97,300. What accounts for this difference?
Answer: The bulk of the difference has to do with the Homestead Deduction, which reduces the real property taxable assessment by $72,450. However, there is a second benefit to the Homestead Deduction that receives a lot less attention, the Assessment Cap Credit. This credit provides that the taxable assessment cannot increase more than 10% per year. The credit is not applied against the assessed value, but it is used to reduce the taxable assessed value. In the above question, the additional credit that reduces the taxable assessment by a further $24,850 is the assessed cap credit. Further, based on the above numbers, next year’s taxable assessment cannot exceed $320,320 ($291,200 plus 10%), regardless of the assessed value (assuming of course that the property is still registered as a homestead).
The District of Columbia Office of Tax and Revenue has great information on their website that explains in detail the real property process and the credits available.
DC Tax Abatement (updated in 2018)
The DC Tax Abatement program is designed by the District of Columbia to help lower-income homeowners. Below are some often asked questions from agents and potential homebuyers.
What does the DC Tax Abatement program entitle me to do?
Assuming you qualify, you are exempt from paying transfer and recordation taxes. This means not only are you exempt from the recordation tax; but customarily, the seller’s transfer tax is credited to you at settlement. You will also be exempt from paying real property taxes for 5 years beginning the next full tax year after filing.
What are the qualifying factors to get DC Tax Abatement?
The qualifying factors for DC Tax Abatement are as follows:
- The purchase price of the property must be $456,000.00 or less;
- The income threshold – max gross income – must be
PERSONS IN HOUSEHOLDS/INCOME LIMITS
- The property must be a principal residence; and
- The purchaser must be domiciled in the District of Columbia.
What does “domiciled” in the District of Columbia mean?
To be domiciled in the District of Columbia you must (a) get a DC government issued ID such as a DC Driver’s license; (b) register to vote in DC; and (c) file DC Personal Income taxes. Please note: the purchaser can obtain/do the above mentioned after the purchase.
What documents are required to get the Tax Abatement?
The documents usually required are:
- Last 2 years income taxes;
- Last 2 W-2s;
- Last 2 paystubs.
If there are any extenuating circumstances i.e gaps in your employment, self-employment, etc., the District of Columbia may require additional documentation from you before approving the abatement application.
Who files the documents so I can get tax abatement?
The settlement agent files the required documents along with the settlement statement and sales contract when recording the deed after closing.
I am in the military, does my housing allowance count as income despite it being non-taxable income? Do I need to change my State of Legal Residence?
Yes. The DC Recorder of Deeds looks at all sources of income, not just taxable income.
Yes, you need to be domiciled in the District of Columbia which includes filing DC income taxes. You can fill out and file a form DD2058 to change your residency to the District of Columbia.
How do I know that my tax abatement application was approved?
The settlement company handling your closing will know immediately because your deed will go on record without transfer and recordation taxes. You will also receive a letter from the District of Columbia confirming that you qualified for the tax abatement and giving the years you will be exempt from property tax.
If I qualify for tax abatement, why is my lender still collecting taxes in escrow?
The real property tax exemption does not start until the next full tax year. In other words, if you settle in April 2018 and the tax period for 2018 is October 1, 2017, through September 30, 2018, you will not be given the exemption until the 2019 tax period. You will be required to pay real property taxes for April through September 2018. Your real property tax exemption will start 2019 and finish 2024.
What happens if my situation changes – am I required to report it to the District?
If your questions about tax abatement have not been answered here, please feel free to contact me 202.362.1500 ext 1514.