What is the proper treatment of seller rent back included in closing statement for purchasing a rental property?

Forum|Forum|7 years ago
June 6, 2019
1 reply
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There are two alternatives:

1. Show rent back as rental income

2. Decrease the cost basis by the rent back (and not show it as rental income).

Which one is the correct alternative?

TurboTax Premier Mac

PatriciaV

Employee

Yes, you have two options for reporting a Rent-Back Agreement when purchasing a Rental Property.

1. Treat this as a reduction in the purchase price. This will lower your cost basis, which may be a factor when you sell the property in the future (increased gain on the sale).

2. Report this as Other Income on Line 21 of Form 1040. Most experts agree this is the more "correct" option. However, you are limited to reporting no more expenses than the income you enter for Line 21. See the instructions below for this option:

https://ttlc.intuit.com/replies/6686826

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Z

zhongjp058

Employee

Can you share any IRS reference for option #1, which states we can "Treat this as a reduction in the purchase price". Searched around Publication 527 Residential Rental Property and only see option #2.

Also if we can use option #1, does it apply to Primary Residence (not only Rental Property ) as well?