General Assembly OKs long-awaited help for buyers SETTLING FOR LESS

April 16, 1995|By Lorraine Mirabella | Lorraine Mirabella,Sun Staff Writer

The first overhaul of Maryland's property tax system in two decades will reduce notoriously high closing costs, saving many homebuyers thousands at settlement time.

The measure, approved last week in the waning hours of the General Assembly session, came as welcome news to homebuyers and business people. The real estate industry has tried for years to rid the state of its reputation as one of the most expensive places in the nation to settle on property.

Savings for first-time buyers -- anyone who never has owned a house in Maryland -- are expected to help jump-start a stalled housing market and boost economic development by bringing costs in line with those of neighboring states.

"It really does something about both the perception and substance that closing costs are too high in Maryland," said Michael Gisriel, a lobbyist for The Maryland Chamber of Commerce, which led a coalition of business, real estate and mortgage trade groups in pushing for lower closing costs. "Maryland is definitely cutting costs for first-time homebuyers and helping economic development in the state."

Costs will drop by thousands of dollars for many first-time buyers. But some sellers and move-up buyers could end up paying hundreds more because they will either absorb costs or see their taxes increase.

Lawmakers targeted first-timers -- viewed as a crucial link in the homeownership chain -- for most of the relief. Such buyers typically have limited savings and no equity in property. In a bid to attract out-of-state businesses and buyers, the law includes anyone who never has owned property in Maryland.

Unlike most states, Maryland requires advance payment of a year's property taxes and levies a half-percent transfer tax on all transactions. Some counties levy an additional transfer tax, the highest at 1.6 percent in Baltimore County.

Several studies of the nation's closing costs rank Maryland near the top. The cost of closing on a $150,000 house in Baltimore County is nearly twice the cost of closing in Arlington, Va., according to an analysis by The Sun.

The legislation makes changes in two key areas. Homebuyers and property owners in all price ranges can elect to pay taxes semiannually, rather than annually, beginning with the 1996 tax year. Homebuyers now pay a year's taxes at settlement. Part of it reimburses the seller for prepaid taxes and another part is held in escrow by the lender until taxes are due. Paying semiannually will save a typical buyer of a $150,000 house in Baltimore County about $1,000.

Mary Frusello, executive director of the Maryland Association of Realtors, called the semiannual plan a first step in reducing closing costs, especially since the amount of taxes owed upfront will be halved.

"This is certainly going to help," she said. But allowing taxes to be paid in arrears -- at the end of the year -- would lead to more significant relief, she said. A General Assembly resolution asks the governor to appoint a task force to study such a change.

"This is a wonderful beginning," Ms. Frusello said. "It's a positive step for the legislature to do so much in one session."

The new law also exempts first-time buyers from paying the state transfer tax, a half-percent of the purchase price. Under current law, buyer and seller typically split the tax, though they can negotiate other arrangements. The new law eliminates any negotiation between seller and first-time buyer -- mandating that the seller pay a quarter-percent tax.

Sellers and first-time buyers still will be able to negotiate over local transfer taxes and recordation fees charged by many counties. If they reach no agreement in a sales contract, however, the seller must pay those local taxes and fees.

Because of deferred property tax payments and reduced taxes and fees, a first-time buyer of a $150,000 house in Baltimore County could save $2,720, while a first-time buyer in the city, which has a higher tax rate, could save $3,581, an analysis by the state Department of Fiscal Services shows.

These figures, however, assume that the seller voluntarily picks up the tab for the local taxes and fees -- which may account for half the savings.

The law's passage came as heartening news to Jack Goldenberg, who has been renting in Baltimore County since relocating from Westport, Conn., more than a year ago. He owned a house before moving, but is considered a first-time buyer under Maryland law. The savings will allow his family to buy a house sooner than he'd anticipated, possibly with a larger down payment, he said.

"I was going to move for my job no matter what, but we were surprised at how high costs are," he said. "They're astronomical compared to other states."

The state financed the break for first-time buyers by eliminating an existing $150 buyers' credit.

In 1987, the legislature exempted the first $30,000 of a home's purchase price from the state transfer tax to give all buyers the credit. By eliminating the credit, the state will raise $9.4 million in fiscal 1997.

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