Author Topic: Newbie question on rehabbing a house (above purchase price with large credit)  (Read 2037 times)

millennialstache

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When you experienced rehabbers are looking at a house with 100% cash, do you ever do a high purchase price and then request a huge credit for repairs. For example:

List: $45000
Estimated repairs: $35000
ARV: 110000

What would be the pros and cons of doing a 'purchase price of $50,000' and asking for a repair credit of $15,000 making the effective price $35,000?  Would this not make buyers in the future after repair feel better thinking that I bought it for $50k, and potentially limit your capital gains tax? 

I welcome all advice and thoughts on the subject!

Dividend Youngster

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Are you just flipping this house, going to rent it out...? I know around here you dont have to disclose to future buyers how much you bought it for even though they could find it in public records. Most people wont however because what you paid for it back in time is irrelevant compared to what people are willing to pay for it now. As far as taxes are concerned I think you are either going to pay taxes on 50k instead of 35k and save on capital gains or you are going to save taxes on 35k and pay on higher capital gains.

millennialstache

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The plan is to flip... And could you explain the taxes bit?  Where I live, I don't think there are taxes for buying or selling, just for capital gains.

I feel like it would matter to me what the other person bought it for, since it gives me an idea of the work put into it.

Dividend Youngster

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As far as a I know any sale in the U.S. including real estate has sales tax which normally is paid by the seller but I have seen numerous negotiations where the buyer paid... As far as what you bought it for, the current price is ultimately going to be dictated by what similar places in the area are selling for... The other thing you dont know is, just because someone else put a bunch of work into a place, doesnt mean that the work was done right... I make a living off of cleaning up after people who didnt know current codes or really have any diy skills.

millennialstache

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I don't believe you are correct on the sales tax, taxes are usually only paid on the capital gains.

https://answers.yahoo.com/question/index?qid=20061226152202AAQUuhk

Dividend Youngster

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I stand corrected.. the pro rated property taxes must have been what I was thinking of.

ShoulderThingThatGoesUp

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If you're going to sell it for $110,000, a previous sale of $35,000 is basically identical to a previous sale of $50,000.

millennialstache

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True that's not a huge difference... I think this question can be closed. I found out brokers usually have the concessions and credits in their MLS system. So if a buyer is using a broker, it won't matter.

Roots&Wings

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I stand corrected.. the pro rated property taxes must have been what I was thinking of.

Maybe you were thinking of transfer tax?  Some areas have a transfer tax of X% of the purchase price, e.g. where I last lived, transfer tax was 2% of the purchase price, usually split 50/50 between buyer and seller.