Seller Pays Closing- Increased Sale Price And Taxes
This might be a very simple question, but just had a deal present itself a couple days ago and I need to get this right in my head before signing.
I have a rental property and the tenants just gave me notice last week. A day later, a couple contacted me and said they were interested in possibly buying. It's a tough rental, so I would be willing to sell for a quick $5,000 turnover. The couple agreed to the price and currently we are just hoping the appraisal comes in high enough.
This couple has adequate monthly income, but of course no money down. I agreed to help them out with closing costs, possibly on a 1 year note. Today they called and said the bank would be willing (subject to appraisal) to add in the closing costs and down payment into the mortgage. This would actually up the sale price a couple thousand dollars. If this happens, I am then faced with having to pay tax on a higher sale price, but these monies are really just going back to the buyer.
Any advice on what to do on this? Maybe I'm just looking at it the wrong way or not understanding it correctly. Just seems to me that I am doing them a favor and in return will have to eat the expense of the extra money I will pay on tax for this sale.
Thanks for your help.
K
I would be more willing to get all money right now on such a small deal... What were you planning to make on a one year note a 5k? It doesnt seem worth it to me.. Take the cash and move on..
I think you misunderstood what the buyer is telling you.
Adding their closing costs to their mortgage amount does not change your sale price, and has no net effect on your tax liability. The buyers are simply financing more than the purchase price to minimize the amount of out of pocket cash they need to bring to the settlement table.
just sold a house. buyers offered me 10k over my asking price but i'll be giving that back at closing. it doesnt increase my tax liability because i'll deduct that 10k from the sales price.
The easiest way to try to figure out scenarios like this is to do a proforma HUD1. When you "fill in the blanks", you will see that the extra expenses your are paying artificially inflate the purchase price, but you will have those expenses subtracted from your proceeds at the closing so your "net" will be the same.
Imagine the following scenario:
Purchase price $100,000; buyer paid closing costs $3500; your net is $100,000.
Purchae price $103,500, seller paid closing costs $3.500, your net is $100,000.
I don;t know if too many real mortgage companies that will let a buyer "add" the down payment to the loan - that kind of defeats the purpose of a down payment, doesn't it??; but of course there are many zero down loans, seller carrybacks and "family gifts" that are commonly used.
Thanks to all for your help. As noted in one of the previous posts, someone said I confused the matter by adding in too much information. Basically I just set the sale price, the buyer went to the bank and came back to me asking if I could up the price and would in turn pay closing costs and down payment. This is his first purchase and my first sale. The banker advised him in this direction. It was just very new to me, so wasn't sure if I would have to pay extra tax. I am hoping the banker will write it up specific to the sale price being the same and the extra as closing costs, etc.
Thanks again for your help.
K
OK, bigbear. I hope you can see that these additional details do change the answer to your question.
Essentially, niravmd and feltman already answered the question. Yes, your contract price is higher, but your net profit is reduced by the concessions you give. In the end, if your concession is the same as your price increase, your taxable profit will be the same as it would have been before any changes were made.
As a side note, if you are agreeing to pay closing costs, then don't agree to pay more than your price increase. For example, if your price increase is $3500 you want language in your sale contract that stipulates that you will contribute a maximum of $3500 toward the buyer's closing costs, settlement charges, and any lender funding fees paid by the seller on behalf of the buyer.