When you begin your search for the perfect property there are financial matters that Cathy wants you to know about.
Keep in mind that there are many factors such as tax benefits associated with real estate purchases that may allow you to invest more than you have considered. Consider a conversation with a financial advisor to understand what you are able to afford.
If you are mortgaging the property, there are many types of mortgages from which to choose. Conventional loans are arranged between the borrower and the lender and can be:
- Fixed rate: A mortgage for which the rate of interest is fixed for a set period of time.
- Adjustable rate: A mortgage in which the interest rate changes periodically during the life of the loan according to the movement of a pre-selected index.
- Or a combination of the above
Temporary Loan
A homeowner selling one property and buying another may need interim financing if one home is closing before the other. This type of temporary loan is called a bridge or swing loan.
Package Loan
This includes not only the real estate, but also the furniture.
Closing costs and legal fees change depending upon whether or not you are taking a mortgage. If you are taking a mortgage the lender will give you what is called a "good faith estimate" of the closing cost. This is an itemized list of all the costs connected with closing. Whether you are taking a mortgage or not, you should discuss the closing costs with your attorney.
Always seek professional advice from a mortgage lender or bank.
The buyer and seller engage their own attorneys. They will make sure you are provided with all the necessary documents to facilitate the closing. Local attorneys may save you enormous time and money because of their familiarity with the zoning regulations, and the local real estate process.
Protecting the property against damage or loss is an important safeguard. Speak with insurance professionals and have insurance in place before you close: the minute you sign on the dotted line the property legally belongs to you and if there is an unexpected problem it is your responsibility. (Insurance is so important that if you're mortgaging the property, banks mandate that insurance be in place prior to the closing.)
Closing costs and legal fees change depending upon whether or not you are taking a mortgage. If you are taking a mortgage the lender will give you what is called a "good faith estimate" of the closing cost. This is an itemized list of all the costs connected with closing. If you are not taking a mortgage you should discuss the closing costs with your lawyer.
New York State Taxes
Real Estate Transfer Tax [also known as the Mansion Tax]
- On improved property: This tax is 1% of the full purchase price over $1 million on improved residential property.
- Example: If you're buying a $2 million property with a building on it [that's improved property] the tax is $20,000.
Mortgage Recording Tax
This is an excise tax for recording a mortgage in the real property records of a recording officer. This amount depends on the county. In Suffolk County the tax is 1.05% per $100.00 of the mortgage. But please confirm this with your mortgage professional, as there may be other tax amounts that are included or credited for your
property.
Local Tax
Community Preservation Fund. This fund was established in 1998 and is designed to set priorities for land preservation with farmland preservation the highest of priorities. The fund is built through a tax imposed on the buyers of property.
The tax that applies to the towns of Southampton, East Hampton and Shelter Island are:
- Improved property. The tax is 2% of the price over $250,000.
- Example: On a $2,000,000 purchase, the tax would be $35,000.
Tax Deferred Exchange (1031):
A 1031 Exchange is a way for owners of business and investment real estate to buy other "like-kind" property and defer Capital Gains Tax.
To qualify as a "like-kind" exchange, property exchanges must be done in accordance with the rules set forth in the tax code and in the treasury regulations. The 1031 exchange can offer significant tax advantages. To make it work for you, you should be aware of the many guidelines for qualification. Here is an introduction to just a few of the guidelines:
Definition of "Like-Kind": Properties involved in the exchange must qualify for a 1031 Exchange. Not all properties can be "exchanged."
There are time limits that must be adhered to relating to:
- Length of time you have to hold the property before it can be exchanged
- Limit in the number of days you have to identify the property for exchange.
- Maximum days you have to complete the exchange.
You must identify a "safe harbor" for the financial transaction, so money never goes to you directly. Without the safe harbor, the money will be taxable to you. You will need to familiarize yourself with how a safe harbor works.
Please talk with a tax professional for advice and counsel.