if buyer and seller agree to an increased sales price to assist the buyer with his closing costs, doesn't the seller wind up paying more capital gains on the increase? Is this something that benefits only the buyer? How common is this?
Happens all the time. As long as both the buyer and seller is ok with it, it's usually not a problem. As far as capital gains.... Since 1997, up to $250,000, ($500,000 for married couples) on the sale of a home is exempt from taxation if you meet the following criteria:
1. You have lived in the home as your principal residence for at least 2 out of the last 5 years.
2. The seller has not sold or exchanged another home during the 2 years preceding this sale.
Note: The property you're selling must be your principal residence. That means you have lived in it for at least 2 out of the last 5 years. This tax break doesn't apply to a property that you've owned for investment purposes, such as a piece of rental property. In that case, the usual capital gains rules apply.
Still I recommend checking with a tax professional.
Please check with your tax person, but if it is an investment property you are selling, then all the costs related to the sale of the property are tax deductible. This includes the closing costs you help covers for the buyer.
In this 1031 exchange the replacement property price plus improvements will equal the original investment property (spent by 180 day exchange period). The problem is, when the improvement monies are wrapped in the new mortgage the transaction thats higher (sales price boosted to include closing costs) causes me to borrow and improve more than the original offer would have been originally without agreement to include closing costs. That hardly seems fair that there would be a "penalty" for just allowing that transaction. Is there a way to show it on the HUD as a consession with the actual sales price not including the closing cost boost.
Also, does the debt of the replacement property really have to be equal tto the debt of the original investment property? My accountant says yes. Internet says no such thing as long as the 1031 exchange involves trading "equal or higher" for the replacement property. What's the truth of the matter? If I didn't have to pay $30,000 taxes I wouldn't mess with another 1031 exchange. Does anyone have alot of experience with these transactions?
I have read now that you can subtract selling costs (commission, etc.) from the sales amount which doesn't boost my borrowing from my lender to make up the difference. Although I must read more on the replacement end, exchange costs are deductible there also. The problem is everyone knows a little about 1031 exchanges but there don't seem to be common knowledge when discussing the implications. Each one of the little suckers seems different each time. Discussion on this forum will help. Thanks for the input so far.
Yes. this happens often and the seller does have to pay capital gains, but they are getting the amount of money in hand that they wanted from their home.
The frustrating part of 1031 exchanges is that there are many gray areas within Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations and all of the related Revenue Rulings and Procedures.
I would be happy to answer any questions that you might have and will do my best to explain the gray areas and confusion surrounding each issue.
The correct income tax treatment of a seller credit to buyer for closing costs is a reduction of the seller's sale price, so it would not affect his/her capital gain treatment.
In residential properties, investment and personal residence, most lenders will allow up to 3% of the sales price to be contributed towards closing and pre-paid expenses by the seller. there are some with higher amounts, some with none, and if you get into commercial it's a whole other ball-game! Just know that almost anything is possible in RE, just look for the deal, and then work out the details!