Tax consequences of assignable purchase contract

6 Replies

I have an assignable purchase contract for two houses as a package. I am sure I can sell one of them for enough to pay off the entire contract, at which point I will own the other house free and clear. My biggest question is when the contract is closed out, Do I report the second house,(valued at about $60,000), as income? Or, do I essentially have a zero basis in the second house, and will report a larger gain when it is,(eventually),sold? 

   I am an experienced investor, renovator, flipper, But have never come across the specific situation. Would really appreciate some tax advice here,Or a referral  to someone who might be able to answer my questions. 

Thanks in advance, Stuart at Zombiehouse restoration 

@Stuart Levine

When you purchase the house, you will most likely need to sign a deed transfer with a purchase price allocated to each parcel (property). You can perform a cost segregation study on each parcel using various methods such as assessed value, net income (estimated net income), sqft of building, sqft of lot, or a mix of building and lot. The method that you choose on this transaction must be consistent on any similar future transactions.

I don't know of any regulation permitting a $0 basis election on property. If the price you are paying for both properties is reasonable (FMV for type of payment and condition of property), use a reasonable method that benefits you with the purchase and potential future sale of the first property to retain the majority of capital gains on the second residence.

Hopefully that is somewhat clear, I can illustrate with an example if you are able to provide a few figures such as total price, rent rate, and sqft of the properties.

Originally posted by @Stuart Levine :

I have an assignable purchase contract for two houses as a package. I am sure I can sell one of them for enough to pay off the entire contract, at which point I will own the other house free and clear. My biggest question is when the contract is closed out, Do I report the second house,(valued at about $60,000), as income? Or, do I essentially have a zero basis in the second house, and will report a larger gain when it is,(eventually),sold? 

   I am an experienced investor, renovator, flipper, But have never come across the specific situation. Would really appreciate some tax advice here,Or a referral  to someone who might be able to answer my questions. 

Thanks in advance, Stuart at Zombiehouse restoration 

 If I understand correctly you're buying 2 houses as a package from a whoelsaler?

Then you're going to keep 1 and re-sell 1?

You'll allocate the purchase price you paid for the package between the 2 houses based on a reasonable allocation (tax assessor values for each applied as a %) 

Then when you re-sell the one that will be your basis your gain is applied based on.

@Stuart Levine

This really requires a deep conversation to understand the mechanics of the transaction, but the high-level general theory is this: you received $60k of income and paid $60k to acquire a property (even if you never touched the money, it's an "in-out" transaction).  $60k of income on your tax return.  Basis in the property you kept is $60k.

Thank you all for your replies!

This is my very first experience on this site, and I am beyond impressed and very grateful for not one, but three, very knowledgeable and helpful replies!

   Simply put, my “profit” from this transaction will be the second house, which I intend to hold for a while, (well over a year), the resulting gain, when it is eventually sold, will be long term capital gain. I would like to minimize my reportable profit in the current transaction, which will be taxed as ordinary income plus self employment tax (yuck), in favor of larger taxable gain, at more favorable rates, in the future. Soooo, I would essentially like to know how declare (legally, of course) the lowest possible gain on the one house I am keeping, in this current transaction. 

With much appreciation and amazement, 

       Stuart

@Stuart Levine No, you have it wrong.....your assignment fee you collect on the first property is taxable income.....it doesn’t matter if you buy the second property with it or not. 

@Natalie Kolodij He is the wholesaler, and the fee he’ll make off one house is enough to buy the second house. 

Originally posted by @Wayne Brooks :

@Stuart Levine No, you have it wrong.....your assignment fee you collect on the first property is taxable income.....it doesn’t matter if you buy the second property with it or not. 

@Natalie Kolodij He is the wholesaler, and the fee he’ll make off one house is enough to buy the second house. 

Ahhhh