1.8 LAWS AFFECTING REAL ESTATE

Seven Sources of Law

1. United States Constitution
2. Laws passed by Congress
3. Rules of the regulatory agencies
4. State constitutions
5. State statutes
6. Local ordinances
7. Common law

The unique nature of real estate has given rise to an equally unique set of laws and rights. Even the simplest real estate transaction involves a body of complex laws. Licensees must have a clear and accurate understanding of the laws that affect real estate.

The specific areas important to the real estate practitioner include:

1. law of contracts,
2. general property law,
3. law of agency,
4. the state’s real estate license law,
5. environmental laws,
6. federal, state, and local tax laws,
7. state and local land-use and zoning laws,  environmental regulations.

ILLINOIS REAL ESTATE LAW

Specific Real Estate Laws

The practice of real estate in Illinois is governed by the Real Estate License Act of 2000 (the Act), as amended in 2010, and Rules established by the Illinois Department of Financial and Professional Regulation. This license law is Public Act 96.856, Chapter 225 of the Illinois Compiled Statutes, Act 454.

Other laws affecting real estate in Illinois may be found throughout the Illinois compiled statutes, but many of those addressing real property are in Chapter 765, ILCS

The purpose of real estate license law is to protect the public from fraud,  dishonesty, and incompetence in real estate transactions.

HOME OWNERSHIP

Ownership Expenses and Ability to Pay

Home ownership involves many expenses, including utilities (such as electricity, natural gas, and water), trash removal, sewer charges, and maintenance and repairs. Owners also must pay real estate taxes and buy private mortgage insurance, and they must repay the mortgage loan with interest This is what lenders refer to as PITI (principle, interest, taxes, and private mortgage insurance; those expenses that comprise a monthly payment.

Mortgage Terms

To determine whether a prospective buyer can afford a certain purchase, most lenders use automated underwriting and credit scoring. Certain costs associated with the home purchase (principal and interest payment, taxes and private mortgage insurance — PITI) as well as total debt could not exceed a certain percent of monthly, pre-tax (gross) income. But today, credit scores play a key role when lending institutions decide whether to lend money.

Investment Considerations

1. Purchasing a home offers several financial advantages to a buyer.
2. Possible long-term gain through appreciation
3. Increase in Equity as mortgage is paid off

Tax Benefits

Tax considerations may be an important part of any decision to purchase a home

Homeowners may deduct from their income:

1. some or all of the mortgage interest paid
2. real estate taxes
3. certain other expenses

Capital Gains Tax Exclusion – Sale of Real Estate

Tax Laws now exclude all or a large portion of gain (profit) from Capital Gains Taxes

1. $500,000 is now excluded from capital gains tax for profits on the sale of a principal residence by married taxpayers who file jointly.
2. Taxpayers who file singly are entitled to a $250,000 exclusion.
3. The exemption may be used repeatedly, as long as the homeowners have both owned and occupied the property as their residence for at least two of the past five years.

IRA Use for Down Payment — No Penalty

First-time homebuyers may make penalty-free withdrawals from their tax-deferred individual retirement funds (IRAs)

1. for down payments on their homes.
2. withdrawals are still subject to income tax.
3. the limit on such withdrawals is $10,000
4. they must be spent entirely within 120 days on a down payment to avoid any penalty.

Exchanges

Real estate investors can defer taxation of capital gains by making property exchanges. Even property that has appreciated greatly since its initial purchase may be exchanged for other property. A property owner will incur tax liability on a sale only if additional capital or property is also received; the tax is deferred, not eliminated. Whenever the investor sells the property, the capital gain will be taxed.

To qualify as a tax-deferred exchange, the properties involved must be of like kind as defined under Section 1031 of the Internal Revenue Code. The exchanged property must be real estate of equal value and same use. Any additional capital or personal property included in the transaction to even out the value of the exchange is called boot.

The IRS requires tax on the boot to be paid at the time of the exchange by the party who receives it. The value of the boot is added to the basis of the property for which it is given. Tax-deferred exchanges are governed by strict federal requirements, and competent guidance from a tax professional is essential.

Tax deductions

Homeowners may deduct from their gross income any of the following:

• Real estate taxes (but not interest paid on overdue taxes)
• Mortgage interest payments on most first and second homes (the combined amount of acquisition indebtedness cannot exceed $1,000,000, and the combined amount of home equity indebtedness cannot exceed $100,000)

• Certain loan origination fees in the year of purchase (rules differ for refinance and equity loans)
• Loan discount points in the year of purchase (whether paid by the buyer or the seller)
• Loan prepayment penalties

NOTE — Some costs are NOT allowed as Tax Deductions

1. appraisal fees,
2. notary fees,
3. preparation costs,
4. mortgage insurance premiums,
5. VA funding fees,
6. points are deductible in the year of a house purchase if certain criteria are met.
7. Points are deducted over the life of the loan for a refinance.

These costs are NOT interest but are part of the cost of acquiring a home. When it is sold at a later date, these charges can be figured into the cost basis (Costs which can be added to the price of the home, which total is deducted from the selling price to determine the profit, for capital gains tax purposes.).