Legal FAQs for REALTORS®
What is tax-freeze portability? (updated Jan. 1, 2002)
In 1997, the state legislature and citizens of Texas voted to change the state's constitution to allow eligible senior citizens to transfer their school tax-freeze benefit when selling their home and moving into another home. Effective Jan. 1, 1997, Texans 65 years of age or older who own a home and have their property school taxes frozen can transfer that tax-freeze benefit with them when purchasing and moving into another home in Texas. This transfer is referred to as property-tax-freeze portability. State Sen. David Cain, D-Dallas, sponsored and passed this legislation to ensure that senior citizens living on a fixed income could move without losing their property-tax-freeze benefit. At age 65, a homeowner receives an additional $10,000 homestead exemption and a tax freeze on the amount of school taxes they pay for as long as they own the home. Previously, seniors could keep their $10,000 homestead exemption but could not transfer their school tax freeze to a newly purchased home. This prohibited many seniors living on fixed incomes from moving to another home. In some instances, even a move to a smaller, more efficient home would cost seniors more because of the increase in school taxes they would incur due to losing the tax freeze. Under the old law, if you had your tax freeze in place for ten years and decided to move, your new school taxes were calculated based on current tax rates and appraisals, which resulted in tremendous increases in the taxes you paid no matter where you lived in Texas.
Whom do I call for more information? (updated Jan. 1, 2002)
You should contact your county tax appraisal district for more information on this important benefit for senior citizen homeowners.
My client bought his home a few years ago, but now he wants to sell it and take advantage of the tax exclusion of up to $250,000 on the proceeds. What criteria does he have to meet to qualify for the tax exclusion?(Updated May 15, 2015)
The IRS allows a seller to exclude from his taxable income a gain of up to $250,000 on the sale of his home (or $500,000 if he is married filing jointly) if he:
1. Owned the home and used it as his principal residence during at least two of the last five years before the sale;
2. Didn’t acquire the home through a 1031 exchange during the past five years; and
3. Didn’t exclude a gain on another home sold during the two years before the current sale.
How does portability work? (updated Jan. 1, 2002)
o Your school tax-freeze portability is calculated in the following way: Your county tax appraisal district uses your current home's tax appraisal value and your current frozen school taxes to calculate a ratio. That ratio is applied to the appraised value of your new home to determine the school tax rate on that home. This new tax rate is frozen for as long as you live in that home. The formula is designed to keep your new tax freeze in proportion with your old tax freeze so you don't experience a huge increase in school taxes when you move. If you're 65 or older and currently have a tax freeze in place and are looking to purchase another home to move into, you can contact your county tax appraisal district to assist you. They can help you use the tax-freeze formula to calculate what your property taxes would be at your new home. You can take your school tax freeze with you even if you're moving into a new county. All county tax appraisal districts should be capable of calculating your tax freeze portability using your current home tax status and your prospective new home property-tax appraisal.
What special rules apply to a buyer who is purchasing property in Texas from a foreign seller? (Updated Feb. 24 2016)
The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) requires buyers in certain transactions involving foreign sellers to withhold up to 15% of the amount realized by the foreign seller for federal taxes. The amount realized is usually the sales price.
If the buyer does not plan to use the property as the buyer's primary residence, 15% of the sales price must be withheld and reporting is required.
If a property’s sales price is $300,000 or less, and the buyer plans to reside at the property, then nothing needs to be withheld and no reporting is required.
If the property's sales price is between $300,001 and $1,000,000, and the buyer will use the property as the buyer's primary residence, 10% of the sales price must be withheld and reporting is required.
On sales exceeding $1,000,000, 15% must be withheld and reporting is required regardless of how the buyer uses the property.
The buyer should use IRS Form 8288 and IRS Form 8288-A to withhold the tax. For help filling out these forms, the buyer can visit the IRS webpage devoted to FIRPTA and the forms, or consult his attorney.
Does either agent have liability in a transaction with a foreign seller? (Updated Feb. 24, 2016)
Possibly. If the seller provides a certification stating that he or she is not a foreign person, the buyer will not be required to withhold any tax if the sale results in a gain for the seller. However, if the buyer has knowledge that the certification from the seller is false and accepts it anyway, the buyer will be responsible for paying the 15% tax on the amount realized by the seller on the sale of the property.
The same holds true if either agent has actual knowledge that the certification is false. If that agent does not notify the buyer of this knowledge, the agent will be responsible for paying the tax to the IRS.
What if I represent a foreign seller and he cannot afford to have the 15% tax taken out of his proceeds? (Updated Feb. 24, 2016)
The seller may request an adjustment of the amount withheld from the IRS by filing a withholding certificate application (IRS Form 8288-B). The buyer or buyer’s agent can also request this adjustment.
The IRS will generally act on the request within 90 days of receipt of an application. A seller who applies for an adjusted withholding must notify the buyer in writing that the certificate has been applied for no later than the closing date. Since the seller’s agent may not make the request on behalf of the seller, the seller’s agent should discuss the withholding certificate with the seller as an option during the negotiation process.
Legal Disclaimer: The material provided here is for informational purposes only and is not intended and should not be considered as legal advice for your particular matter. You should contact your attorney to obtain advice with respect to any particular issue or problem. Applicability of the legal principles discussed in this material may differ substantially in individual situations.
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