Close before or after year end?

Question

Hey,

I am purchasing my first owner-occupied (and first ever) home.  Closing is currently set for December 28.  Would there be any reason that the Realtor is trying to close before the end of the year, or any reason that I would want to wait and close in 2011?

I understand interest paid, points pre-paid, etc...can all be written off in whichever year they are paid in.  Is there any additional benefit either way?

Thanks!

Account Closed · Answer

John, there good reasons to close before or after year end if it was investment property because there would also be some tax issues that could affect investor.

With the owner occupied house the buyer may have little to gain from closing before year end at least if they are a first-time home buyer.  Reason being that there will be little mortgage interest and a relatively large amount set side for property taxes.  If the home buyer hasn't been able to itemize in the past this probably means these expenses will not be deductible because the homeowner may not have sufficient deductions to claim the expenses.

Account Closed · Answer

Daniel, I doubt there would be any tax advantage for you closing in this year.  If you close next year you will have a full year of mortgage interest and at least a full year of property taxes.  You are probably going to have your property taxes escrowed and it is not uncommon that they collect extra upfront as a cushion.  In any case you stand a far greater chance of having enough deductions if you close at the beginning of the year.

I don't know the size of your loan but the majority of your interest expense is paid in the beginning years so you get the biggest bang early on.

Daniel Leake · Answer

Charles--I like what you are getting at.  This is what I have been trying to read about.

It seems that there are basically two large expenses I could itemize: Mortgage interest, and property tax.

But, it looks like, to itemize these deductions, they would need to be stacked together.  If I close one tax year, but pay most of the interest in the next year, individually they are not big enough to itemize.

Does that sound right?

John K. · Answer

I know that you are buying an owner-occupied, but I thought I could just point out that in case, somebody would be buying investment property, which is currently rented out - it is better to close in the beginning of the month.
The reason is the prorated rent (so you will get almost full month rent, but your first mortgage payment will be probably on the 1st of next month).

Bryan Hancock · Answer

Yeah....that is the reason I was asking about your loan lock.  What does the contract say about the date?

You may have some leverage in the transaction if the SELLER is the one that wants to close sooner and you can delay contractually and with added time in your loan.

Account Closed · Answer

There is no reason that it makes a difference for you.  I can see reasons for the Realtor or seller though.

The Realtor may have a financial incentive for closing before year end.  Doesn't necessarily matter when he/she gets there check though.

The seller like Bryan said may have the most reason to have the close in 2010.  If there is a capital gain the gains rate in 2010 is quite likely to be better than 2011.  Most financial advisers are predicting that the gains rate will in fact go to 20% and is not likely to be affected by any tax legislation.

The seller may have other reasons for claiming the income in 2010 as well that are totally separate from the RE.

Bryan Hancock · Answer

The main difference is taking expenses this year as opposed to next year.  There could also be a fear of capital gains taxation changes for next year driving a quicker closing.  The timing of the sale likely has more impact for the seller than for you since they will likely pay taxes on the sale.

I can't think of any good reason for you to wait and close in 2011 instead, but that doesn't mean there isn't one.  I am sure if there is one someone on the board will let you know about it!

Is your lock for your loan if you are using one good until a later date?

Close before or after year end?

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