- The Deed
Although the modern real estate closing involves hundreds of pages of legal forms, the only document truly needed to sell property is a deed.
Only the seller signs the deed. However, both parties (the seller and the buyer) should understand the document’s significance and its terms.
The typical deed is two or three pages. At the top of the first page the document states that the seller, in “consideration of” the purchase price, grants to the buyer all of his “right, title, and interest” to the property being sold.
This will be followed by a metes and bounds description of the land or a reference to a map or plan in the registry of deeds illustrating the real estate.
The seller and a notary (usually the seller’s attorney) sign the deed. The transfer takes affect when the deed is delivered to the buyer. The buyer will then document his ownership by recording the deed at the registry of deeds.
When two or more people own the same piece of real estate, the language in their deed will determine what type of ownership they share.
Typically, the deed will state that the land is being transferred to the new owners as tenants in common, joint tenants, or tenants by the entirety.
The type of tenancy stated in the deed will determine what happens to an owner’s share of the property upon his death.
Here is a quick summary of how these different forms of joint ownership work:
Tenants in Common – Upon the death of such an owner, his interest in the property will go to his heirs or to the beneficiaries named in his will.
Joint Tenants – Upon the death of a joint tenant, his interest in the property will go to the remaining joint owner or owners.
Tenants by the Entirety – This is a form of joint ownership that only married couples can share. If one spouse should die, the surviving spouse will instantly become the owner of the property in its entirety.
2. Limited Power of Attorney
A power of attorney (POA) allows you to appoint an “attorney-in-fact” to sign legal and financial documents on your behalf.
Prior to a real estate closing, the seller signs a limited power of attorney authorizing his lawyer to sign closing paperwork on the seller’s behalf.
As I mentioned earlier, lawyers usually meet with their respective clients on the morning of the closing to sign paperwork. The lawyers then meet with each other later in the day to close the deal.
The buyer’s attorney will usually have a few documents for the seller to sign. Instead of the seller attending the closing, his attorney will simply sign the documents using the POA.
3. IRS Form 1099s
The seller must complete a questionnaire known as Form 1099s to determine whether the sale proceeds are taxable.
The form is given to the buyer’s attorney at the time of the closing and if the proceeds are taxable the attorney will report the transaction to the IRS
So what sort of real estate sale is taxable?
The IRS rule states that married couples filing jointly can exclude $500,000 of profit on the sale of a primary home from taxes. For single filers, the exemption is $250,000 of profit.
To qualify for this exemption, the seller must have “used the residence as [his] principal residence for periods aggregating 2 years or more during the 5-year period ending on the date of the sale.”
The following example is from the Wall Street Journal:
Say that John and Jane bought a home many years ago for $120,000 and later made improvements that added $100,000 to its cost. This year, they sell the home for $600,000. The gain, or profit, on the sale is $380,000. All of it would be exempt from capital-gains tax due to the $500,000.
The full 1099s is easy to find through an online search. It’s best to review the document in preparation for the closing.
4. Seller’s Closing Disclosure
The closing disclosure (CD) shows the seller how much money he will received at closing. All finalized numbers are contained on the CD.
These numbers include all funds owed to the seller:
- The purchase price
- A credit for fuel being transferred with the house (if applicable), and
- A credit for the portion of the tax quarter that the seller has already paid
The CD also contains all expenses that the seller must incur at the time of the closing. These usually include the following:
- The mortgage payoff
- The final water and sewer bill
- The real estate agents’ commission
- The legal fee for the seller’s attorney
- The stamp tax charged by the registry of deeds. This fee is $4.56 per thousand of the purchase price
The seller’s expenses will be deducted from the funds owed to the seller and the seller will receive the remaining money in the form of a proceeds check.
The seller’s closing disclosure is prepared by the buyer’s attorney. It’s usually sent to the seller’s attorney the day before the closing. The seller’s lawyer will review the document with the seller and then sign the document on the seller’s behalf when he meets the buyer’s attorney to close the deal.
The seller should keep a copy of the CD after the closing. Often accountants will ask for a copy of the document when preparing the seller’s income taxes. It will also be necessary if the seller is seeking a new mortgage for an upcoming home purchase or refinance.
Law Office of Justin R. McCarthy 