Prorated Property Taxes
I know, I know, this one you want to forget. I’m sorry! But since Uncle Sam certainly won’t let you, I would be doing you a disservice not to remind you that taxes are due up until the day of closing.
Taxes on the home sale
UGH, more taxes?! Any good news???… maybe. Check out the saving strategies below for some legal ways to save on the capital gains tax when selling an investment property or home.
Homeowners’ Association (HOA) Transfer Fee
While HOAs are not common with multifamily or single-family homes in Philadelphia, they are typical with new planned developments and condos. In those cases, it’s important to inquire if the HOA charges a transfer fee.
Outstanding Liens or Judgments against the property
This is one of those situations that tend to make sellers a bit nervous, and another perfect example of the importance of having an excellent real estate attorney help you navigate tricky situations.
Brilliant Bonnie also shared her real estate legal expertise on this matter. Just because you have a lien or judgment on a property doesn’t mean you must pay it off in advance of selling your property. Most of the time the sales proceeds will pay off any liens at closing. It just needs to be taken into consideration when negotiating with a buyer. If you owe more on the house than the purchase price, you may need to negotiate a “short sale.”
It’s also important that the buyer is made aware of the situation up front, because otherwise, Heidi will find it when she does your title search creating a snag in your previous negotiations.
This also applies if you’re selling an investment property or home with violations or permit issues. If you’d like to know more about this specific situation, it may be helpful to check out this article on how to Sell My House in Philadelphia with Code Violations.
These closing costs in Philadelphia may include mortgage, insurance, taxes, utilities, etc. Basically, anything to keep your property running.
To get a sense of how much these holding costs amount to, between 2018-2019 (because let’s face it, 2020 was an unreliable year, at best) the median days on market in Philly ranged from 50-80 days. So, you should budget at least 2-3 months towards this Philadelphia closing cost.
While you may think it would be a good idea to skimp on some of these expenses, by shutting off utilities if no one lives in the property, for example, I wouldn’t suggest it. If you did so, that may affect how quickly the property sells. I mean, how long would you spend daydreaming in a home with no heat in winter or worst yet, how would you be able to plan in a property with no light?!
If you’re selling an investment property with tenants, this may not be as big of a financial burden as your tenants will offset some of the holding expenses. However, if you are trying to sell a property with tenants, here’s another article on 6 Concerns Selling A House with Tenants in Philadelphia you should be aware of.
If you’re selling your home, make sure to budget for moving costs such as supplies, movers or a moving truck, etc.
Also, if you’re using movers, be extra cautious during your research. Some moving companies will intentionally load the truck to take up maximum, instead of minimum, amount of space. Since many companies charge by the space, this means a larger bill for you than quoted and a bigger paycheck for them for the same amount of work!
Now, if you’re selling an investment property you may think you’ve dodged this Philadelphia closing cost; however, that may not be the case. Take into consideration if you’re selling a house with tenants that you may need to pay them cash for keys to incentivize them to move by covering their moving costs.
Saving Strategies – as promised, here are some final ideas on how to save on these closing costs in Philadelphia.
- The biggest expense when selling a property will be your tax burden on the proceeds of the sale, also known as capital gains tax. Fortunately, in a moment of brief insanity, our dear Uncle Sam created two legal loopholes to cut us some slack:
- A 1031 Exchange allows you to avoid paying capital gains tax when selling an investment property if you reinvest the proceeds from that sale into a like-kind investment within a certain time limit.
- 2-Out-of-5-Year Rule is specifically for selling your primary residence. If you’ve occupied the property for any 2 (even non-consecutively) out of the last 5 years, you can write off some proceeds. Currently, the amounts stand at $250K when filing your taxes as single and $500K when filing with a spouse.
- It’s critical to keep in mind that these rules and amounts can change at the whim of Washington, so be sure to call your CPA or real estate attorney to confirm any real estate tax strategies you’re looking to employ. Not only can an attorney help you navigate the lay of the law, but the really good ones, like Bonnie, work with other investors regularly and may even be able to help you find properties to fit your 1031 Exchange needs.
- Depending on your expenses, holding costs may also creep up on you if you don’t have a tenant currently occupying the property. In certain situations, a short-term rental, like an AirBnB or temporary housing for health care professionals, might be the right fit. This income may even offset the staging costs.
- Pro Tip: you may think this sounds like a whole lot of work and it can be! Fortunately, there are professionals out there, like Scott Yesner of Bespoke Stay, that focus on managing STRs. These professionals can help guide you on whether this savings strategy would be the right approach for you.
- Remember that day when Jim needed a ride to the airport? No, not PHL, the time when you drove him to Newark! The easiest method to save on unexpected Philadelphia closing costs is by recruiting some friends for moving day. If Jim still needs a little convincing, tell him it won’t be so bad since you read the 3 Strategies to Make Moving Your Home in Philadelphia Easier. You’re welcome.
- Also, if you’re relocating for work, you could ask your employer about paying for your moving costs. It is not unusual in these circumstances for your employer to pay for the movers and even temporary housing until you find your permanent new home.
What matters most when considering these unexpected closing costs in Philadelphia is the big picture. What are your specific situation and motivation to sell? Is time critical?
If you’re selling an investment property but have a pre-payment penalty, can you hold out until that penalty period expires? If not, maybe you can collect the resources to do a 1031 Exchange and save on the capital gains tax.
If you’re selling your home, have you lived there at least 2 years out of 5? If not, can you move back for the next 6 months, or whatever time is still needed, to meet the 2-Out-of-5-Year Rule?