Our Blog
22 AprTax Credit Deadline and “Binding Contract”
The information contained in the post is based entirely on my OPINION based on the research we have done surrounding this issue. Please note that we are not attorneys or tax professionals therefore we are not providing legal advice surrounding the Federal tax credit for first time homebuyers or move-up buyers.
Whenever we get questions about the Federal Housing Tax Credit I always reference the National Association of Home Builder’s Frequently Asked Questions page. Recently we have been asked some questions that are not answered on that site. Here are the questions we have received and hope to clear up within this post:
The Deadlines
There are 3 deadlines for the Federal Housing Tax Credit to be aware of:
- you must enter into a “binding contract” on or before April 30, 2010
- you must close on or before June 30, 2010
- members of the military and certain federal employees are provided a one year extension of the dates above
The “Binding Contract”
According to the IRS, “you must enter into a binding contract to buy the home before May 1, 2010, and close before July 1, 2010, in order to obtain the credit.” The term “binding contract” has created confusion in the real world due to situations such as short sales, HUD Homes or bank owned properties. In all of those situations the date the buyer and seller agree to the contract may be different from the actual date the contract is considered “binding”. I visited a lot of different websites, blogs and forums to get an idea of what others thought. Here is what they said:
According to the IRS, a buyer must have Bank Acceptance on a Short Sale by the deadline (April 30th) in order to qualify for the credit. I was told that acceptance by the seller on a Short Sale does not constitute a “binding agreement” and the terms of the tax credit call for just that, a binding agreement.”
RealTown.com: http://www.realtown.com/community/RealTalk/view/YZEIPEA?page=1
Buyers who want to claim the credit should be wary of short sales.
BankRate.com: http://www.bankrate.com/finance/mortgages/last-minute-homebuyer-tax-credit-tips-1.aspx
It is only my personal opinion that IRS will consider it a “binding contract” if all parties to the contract have signed the “Offer to Purchase” by April 30, 2010 and there is no contingencies other than inspections, appraisals, title etc.
John Willoughby on Ezine Articles: http://ezinearticles.com/?First-Time-Homebuyer-Tax-Credit—What-is-a-Binding-Contract?&id=4085198
The last site I wanted to quote was the IRS themselves on a previous issue surrounding a “binding contract”. Here is what they stated was considered a “binding contract”:
Binding contract—(A) In general. A binding contract is an instrument enforceable under applicable law against the parties to the instrument. The presence of a condition outside the control of the parties (including, for example, regulatory agency approval) shall not prevent an instrument from being a binding contract. Further, the fact that insubstantial terms remain to be negotiated by the parties to the contract, or that customary conditions remain to be satisfied, shall not prevent an instrument from being a binding contract. If a term of a binding contract that relates to the amount or type of the consideration the target shareholders will receive in a potential reorganization is modified before the closing date of the potential reorganization, and the contract as modified is a binding contract, the date of the modification shall be treated as the first date there is a binding contract.
IRS: http://www.irs.gov/irb/2004-37_IRB/ar15.html
My Opinion
You might not care what my opinion is on this but I am going to give it to you anyway. 
Short Sales
Based on everything I read and the IRS’s definition of a “binding contract” I believe that short sales not approved by the bank are NOT considered binding since the “amount or type of the consideration” is still in question and until the bank has approved the short sale, the date of the “binding contract” is not set.
HUD Homes
Once a bid is accepted by HUD there are no changes relevant to the “amount or type of the consideration” and therefore is considered binding even without the actual signature from HUD is considered a “regulatory agency approval” which the IRS has stated “shall not prevent an instrument from being a binding contract.”
Bank Owned Properties
Banks are the seller and will therefore the IRS will require full sign off by the bank on an offer to be considered “an instrument enforceable under applicable law against the parties to the instrument.”. I believe that this means that without a bank signature you do not have a “binding contract”.
Tax Credit Extension?
My opinion…I have no idea! Here is what others have to say though…
- Tax Credit Extension? Don’t Bet the House On It from the Wall Street Journal
- “does not look as if the tax credit will be extended” by Subprime Blogger
- Demand will dictate extension by HSH Associates
Lending A Hand,
Scott Wynn
The Wynn Team
SHARE THIS ARTICLE
Why not extend the closing date on the HBC. I am currently in the first stage of building my own home. There is no way I will close by June 30. Extend the closing date for all people under contract before April 30. What do you think?
I think your suggestion is to extend the close date on your contract out until closing as long as you are under contract prior to April 30, 2010. If that is what you are saying then that would not work due to the IRS restriction that the closing must occur on or before June 30, 2010.
Thank you very much for writing on this topic. I have searched high and low and have until now been able to get some answers.
My husband and I signed a contract for a short sale in Aug 2009, and we did not get bank approval til March 2010. There were two separate loans that needed to be approved. We had approval in March from both banks, yet we asked for an extension to the closing date because they had only given us 15 days. We have approval from the first and primary loan for our closing date in late May, and today on April 30th we are still waiting for the second loan to approve the new closing date in late May rather than early May.
We had approval from both banks before April 30th. Now, are we negotiating “insubstantial terms”? and are we safe for the 8,000 tax credit?
Thank you so much for your time,
Layla
Excellent question! From my research, I believe your explanation that the extension of closing date yet to be approved is considered “insubstantial terms” is accurate. You had the short sale approval in hand and the contract was “binding” with those approvals. Now you are merely working towards the date at which the transaction will close. My opinion would be that this would meet the IRS’s definition of a “binding contract”, but you might want to check with a CPA to be sure.
Thank you very much. We also will be looking for a CPA just to calm our fears. Thanks, Layla
Okay, so we signed a contract for construction on 4/26 and put down our earnest money. The builder did not sign until 5/4 because they knew our home wouldn’t be constructed by 6/30 and wanted to make room for the contracts that DID qualify for the then-credit. However, we DID close before the 9/30 deadline.
If we had backed out of the contract before 5/4, the builder would have kept our earnest money saying we had “signed a contract.” Binding before 4/30 without their signature??? No clue.