New Construction… Now What?

The purchase of a new construction home is exciting, with lots of time for anticipation of moving in to your new home. It feels like the builder rep becomes your new best friend, you get to pick out your packages and upgrades so everything can reflect your style (if the home isn’t already built or spec’d of course!), so with all of the excitement it’s important to keep in mind that there are pitfalls that you’ll want to avoid along the way.

Builder-Specific Contracts

Most if not all builders in the area use their own purchase contract forms. Why? Because it allows them to closely control the process, while being very forgiving to the builder and not very friendly towards the homebuyer. Example, there’s often a clause that the builder can delay construction for any reason and must simply begin the construction process on your lot within one year. That does not read that they’ll hand over a fully constructed home in one year, but merely start the build in one year. Regardless of when they tell you that the expected completion date is.

It’s extremely important to know and understand the contract terms that you’re signing and what your rights are if something goes wrong. Many builder contracts mandate the use of arbitration instead of legal action in a court of law. It’s important to know what this means before you find that you need to sue the builder. This might seem like something that wouldn’t happen often, but there are some very good lawyers here in Charlotte that spend their days only litigating with residential new home builders.

If you decide that the contract is too skewed in the builder’s favor and don’t want to agree to the contract there is little that you can do to still purchase the home. Using their contract is like the price of admission to the ballpark just to play the game. If you want the house, you will have to take on the risk.

Homeowners Inspections – pre and post drywall

Even if you’re buying your home new, there could still be issues that you would want to be aware of before closing, so I always, always, always recommend having an inspection done. And not just one inspection for new construction but TWO. The first is called a pre-drywall inspection. This is when everything has been framed, utilities have been installed and the walls are just about the be closed up. Having an inspection completed at this point allows the inspector to view areas of concern that are normally hidden behind drywall, meaning that they can see more potential issues. Just because a home is new doesn’t mean that it was built correctly, so buyer beware.

Once everything is completed I recommend having a traditional homeowners inspection. This is when the inspector will go through and look at everything they can to ensure it was built the way that it should’ve been. They will also find things like loose door molding and other random things that you’ll want the builder to fix prior to closing.

Environmental testing

Though a house might be new there’s still good reason to test things like water quality and whether or not the home has high levels of radon gas. Even if a geographical area isn’t know to have issues with radon there are some building materials that may be included in the house that might spike levels and that’s an important thing to know before you move in. Example, granite, though trendy in both kitchens and bathrooms, can be known to emit high levels of radon, so know your stuff and get a test.

First Year Warranty

Many builders will offer a warranty on their homes at the 12 month after closing. The builder will do a walkthrough with the owners and fix anything that may have broken or settled during the first year that you’ve lived there. This is another GREAT time to get a full home inspection. This gives you a full report with issues listed and pictures provided for the builder to then go and fix. I recommend scheduling a home inspection around month 11 so you’re prepared for the builder’s walkthrough. I also recommend keeping a running list of items you corrected taped to the inside of a kitchen cabinet. You might forget about that kitchen cabinet that doesn’t close quite right and miss having it fixed without you needing to call a fix-it person.

Sales Process

For builders this is a business, and they treat it as such. They are very savvy, so it’s important that you have someone on your side to represent you and your interests. Plus, it’s good to have someone that understands the builder’s sales process. Sales people have quotas to meet on a monthly and quarterly basis, so sometimes there’s more wiggle-room in the price than people realize. They have a purchase price listed but what they don’t tell you is that they likely have a range of prices they’re willing to accept if it means making a sale. You’ll have more luck negotiating on price if you buy already built inventory home, but if homes are slow to sell they might make an exception if you’re looking to go under contract on a to-be built home. You never know, so ask! And if you have any questions or changes that the sales staff agrees to, be sure to get it all in writing before signing and giving your deposit.

Tax Time is Coming!

It can be daunting to figure out what documents you need to give your CPA or tax preparer in regards to your home, mortgage and real estate investment properties, so I’m here to make your preparation a little bit easier by answering some common questions I get.

Q: I own a house that I live in full-time as my primary residence, what are the basic documents you need each year?

If you have a mortgage, you should get a form 1098 from your mortgage lender showing the total interest that you paid during the year in Box 1. If your lender pays your property taxes on your behalf (aka you ‘escrow’ for your taxes) then your real estate taxes for the year should also be on this form (check out Box 10).

If you handle paying your own property taxes then you’ll also want to locate a copy of your tax bill. If you can’t find the original copy that was mailed to you around September, then you can look it up on the county website by your address.

Q: I bought or sold my house in 2020, do you need anything additional?

Yep! We’ll want a copy of the Closing Disclosure (CD) that you signed at the Closing Attorney’s office when you bought and also when you sold. Your costs to close on the home may be deductible on your taxes whether you are the buyer or the seller in the transaction. Also, depending on when during the year you purchased or sold the home there may be some information relating to the proration of property taxes that we’ll need to take into account when preparing your taxes.

If you sold your home we may ask you for a copy of the CD from when you originally purchased it. This can appear tedious, but please know that if we’re asking for this it’s very-very important. We’re calculating how much gain you earned on the sale of your home. If you sold your home for much more than you originally purchased it for, there are exclusions for the gain with the amount of the exclusion being tied to whether or not you’re married for tax purposes. We may also ask you for a listing of improvements you made to the house during the time that you owned it. These expenses can help to minimize how much of the gain you have to pay taxes on.

Q: I refinanced my house, how does this impact my taxes?

The costs you paid to close on the new loan may be deductible for tax purposes, so please provide a copy of the Closing Disclosure (same as above). If you took out a line of credit (also known as a second mortgage) on your home, the costs to set this up and the interest you pay might be deductible for taxes but only if you used the money to expand or substantially improve your home.

Did you take a LOC on your home to pay off credit card debt or something outside of home improvements? Then it’s not deductible on your taxes.

Q: I have a rental property, what do you need to include it on my taxes?

Assuming that you don’t own the rental property within another entity, the income and expenses will be included on your personal tax return. We’ll want a schedule showing all of your rental revenue and all of the related expenses you paid for the property during the year.

If you made any improvements or repairs that cost over approximately $500 and have a useful life greater than one year, (for example: a kitchen remodel, a new furnace, new roof, etc.) we’ll want a listing of those items and amounts paid as well. Instead of claiming the expense deduction all in one year, we will claim the expense ratably over the next few years that you theoretically use the improvement.

Q: I currently rent, does this impact my taxes?

Nope, renting does not give you any tax benefits. There are no writeoffs for renters like there are for people who own their home. This could be a really good reason to look into buying a home instead of dealing with increasing rental prices on a yearly basis.

Q: I have a question about real estate and taxes that you didn’t answer here. What do I do?

Reach out to your tax professional or shoot me an email at erincoffey@kw.com I will try to answer general questions as best I can. Please note that anything I say here is not to be construed as tax advice. If you have a question about your specific tax situation it’s best to reach out to someone who has all of your details, I’m only discussing general ideas and information here.