Some buyers can save on upfront realty taxes


May 22, 1994|By Michael Gisriel

Q: I recently heard something about a new law that would allow homebuyers to pay their real estate taxes semiannually. Where and when does this law take effect, and how will this law help homebuyers?

D. Huntermark, Baltimore

A: The General Assembly passed a law in 1993 that let all Maryland counties and Baltimore allow homebuyers to pay real estate taxes six months in advance, instead of the current 12 or 14 months in advance -- the practice in Maryland since 1967.

This requires homebuyers to come up with less cash at settlement -- six to eight months' worth instead of l2 to 14 months' worth. Legislators wanted to reduce somewhat the closing costs in Maryland, among the highest in the country.

Baltimore then passed a bill to allow homebuyers in the city to take advantage of the change. The city law will benefit first-time homebuyers from July 1 until Dec. 31. All homebuyers in the city will be eligible beginning in January.

A similar law, which is restricted to only first-time home buyers, will take effect July 1 in Harford County.

As of last week, no other Maryland county had enacted similar legislation.

An important note: Borrowers who want to take advantage of this change must use a mortgage lender that offers the semiannual tax payment program. Also, a fee may be charged by the city or county to defray administrative costs.

Q: My husband and I were a week late with one of our monthly mortgage payments last year, so we were charged a $45 late fee. Can we deduct that penalty on our tax return?

A: Unfortunately no.

A late-payment penalty is never deductible because it is merely a fine.

However, a prepayment penalty that is levied when a borrower pays a loan's entire balance off ahead of schedule is fully deductible because the Internal Revenue Service considers prepayment penalties "mortgage interest" rather than a fine. (Prepayment penalties are illegal in Maryland.)

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