Author Topic: Do buyer closing costs reduce seller's gain?  (Read 3518 times)

YTProphet

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Do buyer closing costs reduce seller's gain?
« on: September 25, 2015, 10:50:25 AM »
I'm selling my house and the buyer wants me to increase the purchase price by $10k and give the $10k back to him to complete a few repairs. If I do that, can I decrease my gain by $10k since it's not really profit for me.

GizmoTX

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Re: Do buyer closing costs reduce seller's gain?
« Reply #1 on: September 25, 2015, 11:23:19 AM »
No. That's just one reason why this is a bad idea. Usually the price gets lowered to cover repairs. Why aren't you doing the repairs?

Beaker

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Re: Do buyer closing costs reduce seller's gain?
« Reply #2 on: September 25, 2015, 11:41:48 AM »
You'll probably also get to pay extra sales taxes and an extra few hundred bucks for the agents' commissions. Awfully nice of the buyer to spend money out of your pocket so that he can finance his repairs.

YTProphet

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Re: Do buyer closing costs reduce seller's gain?
« Reply #3 on: September 25, 2015, 12:00:47 PM »
You'll probably also get to pay extra sales taxes and an extra few hundred bucks for the agents' commissions. Awfully nice of the buyer to spend money out of your pocket so that he can finance his repairs.
Yeah, I told him that he'd have to cover whatever extra transfer taxes were incurred. There are no agents involved so that's not an issue. My main concern was whether it'd increase my gain for IRS purposes even though the reality is that I don't net any more/less money by doing it.

Cathy

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Re: Do buyer closing costs reduce seller's gain?
« Reply #4 on: September 25, 2015, 12:38:57 PM »
The tax issue is more complicated than the reply by GizmoTX suggests. I was very surprised to see a breezy "no" without any reasoning. I would be interested in the legal analysis that backs up that absolute and unqualified conclusion.

Moving along, here is some general information on this topic.

The starting point is that the basis of property shall be adjusted "for expenditures, receipts, losses, or other items, properly chargeable to capital account". 26 USC 1016(a)(1). Another statute, 26 USC 263, is tittled "Capital expenditures" and says that "[n]o [current] deduction shall be allowed for" various capital expenditures. The function of this latter statute is to ensure that any tax benefit for capital expenditures be deferred until such time as the property is sold. To be clear, though, this latter statute only says when an item is not a deduction (as distinguished from an adjustment to basis). The provision at 26 USC 263 does not purport to provide an exhaustive list of capital expenditures or items "properly chargeable to capital account" within the meaning of 26 USC 1016(a)(1).

The basis adjustment regulations say that "[n]o adjustment shall be made in respect of any item which, under any applicable provision of law or regulation, is treated as an item not properly chargeable to capital account but is allowable as a deduction in computing net or taxable income for the taxable year". 26 CFR 1.1016-2(a). Thus, in the case of a rental property, repairs are frequently not "properly chargeable to capital account" because they are "allowable as a deduction in computing net or taxable income". However, in the case of a personal residence, repairs are not deductible as such, and this regulation does not explicitly remove them from being "properly chargeable to capital account".

I have located countless webpages that appear to arrive at a very questionable interpretation of these above-mentioned provisions. However, the Supreme Court has explicitly stated that the function of 26 USC 263 declaring certain things to be capital expenditures is to prevent taxpayers from enjoying a tax benefit earlier than they otherwise would. United States v. Hill, 506 US 546, 555 (1993). The statute does not purport to provide a list of what is not "properly chargeable to capital account" within the meaning of 26 USC 1016(a)(1).

To reiterate: In the rental context, repairs are usually not added to basis because they are "currently deductible". That is not the case for personal residences, so repairs are not automatically excluded from being "properly chargeable to capital account", but that also doesn't mean that they necessarily can be included as an adjustment to basis; one still needs to consider whether they are, in fact, "properly chargeable to capital account". I was considering doing some further research to provide additional information on that matter, but this all I feel like writing at this point.
« Last Edit: September 25, 2015, 01:10:22 PM by Cathy »

GizmoTX

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Re: Do buyer closing costs reduce seller's gain?
« Reply #5 on: September 25, 2015, 01:35:21 PM »
It sounds like the buyer wants the seller to provide him with a cash kickback that the buyer is getting a mortgage on. Never mind whether the appraisal will support the higher sales price, which will be part of the gain calculation for IRS tax purposes, assuming it's over the allowable exclusion. The seller is not a bank.

Cathy

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Re: Do buyer closing costs reduce seller's gain?
« Reply #6 on: September 25, 2015, 02:35:23 PM »
I suppose the meaning of "give the $10k back to him to complete a few repairs" is ambiguous.

My initial interpretation was as follows: Before the formal transfer of title, the OP will pay the buyer $10,000 for repair services on the property. After the buyer completes the repairs, the house will then be sold at the full value including the value of the $10,000 repairs. In this scenario, the question is whether the $10,000 of repairs purchased from the buyer are "properly chargeable to capital account" within the meaning of 26 USC 1016(a)(1) as discussed above.

Let's suppose instead that OP isn't actually purchasing any repairs. Instead, OP is just entering into an agreement whereby OP purportedly sells the house for $x + $10,000 but then transfers to the buyer $10,000 as part of the closing. In this scenario, the OP would have to research whether, in substance, the house was actually sold for $x, not for $x plus $10,000, i.e. that the $10,000 was not income because it was received under the condition that it would be immediately repaid to the person who paid it over (i.e. OP will not get to enjoy use of the $10,000). Under that theory, the buyer might be perpetuating a fraud on the mortgage company, but it's not clear if that is relevant for the purposes of OP's taxes.

I've already spent too much time researching the issues in this thread, so I'll leave it to somebody else to complete the research here. I express no view on the merits of any issue discussed. This is general information only and cannot be relied on.
« Last Edit: September 25, 2015, 02:42:59 PM by Cathy »

YTProphet

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Re: Do buyer closing costs reduce seller's gain?
« Reply #7 on: September 26, 2015, 06:18:16 AM »
It sounds like the buyer wants the seller to provide him with a cash kickback that the buyer is getting a mortgage on. Never mind whether the appraisal will support the higher sales price, which will be part of the gain calculation for IRS tax purposes, assuming it's over the allowable exclusion. The seller is not a bank.

Yeah - this is what's going on. He wants to finance the full amount (repairs included). Since the way he's got his credit line structured (he's a builder) allows him to finance the full amount, he wants to increase the price to cover some repairs as well.

They're not truly routine repairs, though. It's a piece of vacant land and some telephone poles need to be moved to make room for a house. It's gonna cost him $25,000 to move the poles.

YTProphet

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Re: Do buyer closing costs reduce seller's gain?
« Reply #8 on: September 26, 2015, 06:20:51 AM »
I suppose the meaning of "give the $10k back to him to complete a few repairs" is ambiguous.

My initial interpretation was as follows: Before the formal transfer of title, the OP will pay the buyer $10,000 for repair services on the property. After the buyer completes the repairs, the house will then be sold at the full value including the value of the $10,000 repairs. In this scenario, the question is whether the $10,000 of repairs purchased from the buyer are "properly chargeable to capital account" within the meaning of 26 USC 1016(a)(1) as discussed above.

Let's suppose instead that OP isn't actually purchasing any repairs. Instead, OP is just entering into an agreement whereby OP purportedly sells the house for $x + $10,000 but then transfers to the buyer $10,000 as part of the closing. In this scenario, the OP would have to research whether, in substance, the house was actually sold for $x, not for $x plus $10,000, i.e. that the $10,000 was not income because it was received under the condition that it would be immediately repaid to the person who paid it over (i.e. OP will not get to enjoy use of the $10,000). Under that theory, the buyer might be perpetuating a fraud on the mortgage company, but it's not clear if that is relevant for the purposes of OP's taxes.

I've already spent too much time researching the issues in this thread, so I'll leave it to somebody else to complete the research here. I express no view on the merits of any issue discussed. This is general information only and cannot be relied on.

The money is going to be "paid" at closing. In reality, no extra money will actually change hands since this will all be done on the closing statement. Instead of wiring X, his bank will wire X+$10k, with the X still going to me and the $10k going to him. 

robbyho

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Re: Do buyer closing costs reduce seller's gain?
« Reply #9 on: September 26, 2015, 06:36:33 PM »
I assume you are using an attorney for the closing, so why not run this by them? In CT, this is very common, called a closing cost credit, usually for repairs that need to be done. It's a way for the buyer to put less out of pocket into the purchase. Typically agents don't calculate their commission based on the total price including the credit, but rather the closing price minus the credit. Not sure how that works for tax purposes. Because it is so common, I'm sure your attorney would know or refer you to an accountant.

Wile E. Coyote

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Re: Do buyer closing costs reduce seller's gain?
« Reply #10 on: September 26, 2015, 09:19:53 PM »
Is this your primary residence, have you lived there 2 out of the last 5 years, and have you not claimed the home sale exclusion in the last 2 years?  If so, your gain may be excluded from income for federal income tax purposes if it is $250k or less if you are single.

YTProphet

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Re: Do buyer closing costs reduce seller's gain?
« Reply #11 on: September 28, 2015, 07:33:05 AM »
Is this your primary residence, have you lived there 2 out of the last 5 years, and have you not claimed the home sale exclusion in the last 2 years?  If so, your gain may be excluded from income for federal income tax purposes if it is $250k or less if you are single.

Yeah, the gain will be excluded but I have to sell the adjoining house first. I'll have to pay quarterly withholding if I don't sell the house before the new year. Then, if do pay the quarterly withholding and sell the house within two years of the sale of the land, I'll have to go back and amend my taxes.