Question

Tenant relocation fee

Forum|Forum|1 year ago
August 29, 2024
3 replies
0 views

Dear Experts, I am selling my income property. The buyer asked us to credit him $15,000 relocation fee to vacate a specific unit at the close of escrow. However, he prefers that we just list “credit of $15,000 to buyer” in the closing statement and not mention “relocation fee”. Two questions: 1) Is it OK not to specify what the credit is for in the closing statement? 2) Will it cause any trouble if IRS audits us? Thanks!

Not A Product Question

N

NCPERSON1

@jlo90275 I am confused. Is your buyer currently your tenant? what specific unit is this? where he is living currently? why did you agree to what is in effect a $15,000 reduction in the sales price?

J

jlo90275Author

@NCPERSON1 The buyer is not my current tenant. This unit that he wants to vacate is one of the units in the apartment building that we are selling in CA. He plans to move in that unit after close of escrow so that he can apply for owner-occupied loan. The $15,000 is the credit for relocation fee for the current tenant in that unit. However, the buyer does not want us to show in the counteroffer or closing statement that $15,000 is credit for relocation fee nor for repairs credit as we are selling the property as-is. He just wants us to us a generic term “credit of $15,000 to buyer” but we are not sure if it will cause us any issues with future potential IRS audit.

O

Opus 17

Employee

@jlo90275 wrote:

@NCPERSON1 The buyer is not my current tenant. This unit that he wants to vacate is one of the units in the apartment building that we are selling in CA. He plans to move in that unit after close of escrow so that he can apply for owner-occupied loan. The $15,000 is the credit for relocation fee for the current tenant in that unit. However, the buyer does not want us to show in the counteroffer or closing statement that $15,000 is credit for relocation fee nor for repairs credit as we are selling the property as-is. He just wants us to us a generic term “credit of $15,000 to buyer” but we are not sure if it will cause us any issues with future potential IRS audit.

In that case my original answer is confirmed. For IRS purposes, the selling price is net of any credits. If you sell for $100,000, or for $115,000 with a give-back credit, the net price is still $100,000. Or, to explain it another way, if you listed the property for $100,000, and the buyer negotiated you down to $85,000; or if the buyer agreed to $100,000 but negotiated a $15,000 credit, either way your net sales price is $85,000. That's all the IRS cares about.)

This is mostly a way for the buyer to show a higher price on his mortgage application (if he needs one) or maybe just to keep the property values up in the neighborhood.

O

Opus 17

Employee

For tax purposes, your selling price is the net after all credits. The IRS doesn't care if you sell for $100,000, or for $115,000 with a "seller credit" of $15,000. The selling price for tax purposes is $100,000 either way.

The bank might care, since using an inflated selling price might allow the buyer to get a bigger mortgage than they should, but that's between them and the bank.

N

NCPERSON1

The IRS may care (on the buyer's tax return) as a relo incentive payment would be reportable income to the buyer

J

jlo90275Author

Thank you all so much for your thoughts and suggestions!
The buyer is now willing to use this verbiage - “seller to credit buyer $15,000 for closing cost at close of escrow “.
Is this an acceptable solution for us? Thanks again!

A

Anonymous_

Employee

No text available

N

NCPERSON1

@jlo90275 it's fine, but since the buyer is seeking financing, the lender is apt to ask what that represents.

Not your issue if the buyer is going to finance AFTER he closes, but lenders lend on the basis of the LOWER of the sales price or appraised value. Adding the $15k to the sales price may increase the representation of the sales price beyond its market value. The lender is apt to net the $15k against the sales price for their analytical purposes when underwriting the loan.

it COULD BE your issue if the buyer is seeking financing prior to closing of the transaction and it makes it challenging for the buyer to obtain that financing.

It's not a tax issue, it's an lending issue.