Depends upon how the deal is structured. Give us a specific example and we can respond with more authority.
Let's take a hypothetical example. You find a seller willing to take back up to 25K on a second mortgage to sell his 100K property.
You agree to purchase for 100K, using 80% financing provided the seller takes back a 25K second mortgage note. In effect, you are purchasing the 100K property with 105K in financing. After the seller is paid, there is 5K left on the table that goes into your pocket.
In this example, your 5K cash back at closing is not taxable income. Instead it is borrowed money that must be repaid.
Dave
I am looking at a property that the owner is asking 125K. It should appraise for at least that. He is willing to pay for some portion of the closing costs. I plan to offer him 125K with 12k back in cash to me, at closing, in lieu of him paying for some of the closing and my negotiating the asking price. My experience has been that the appraisal companies will only appraise a property for the sales price, and not a dollar more. If the sales price is 125k and I am essentially only paying 113k, I may be able to utilize some of the equity towards another purchase, and get a mortgage without PMI for less than 20% down.
Purchase price 125k (20% down=25K) plus closing costs 4k for total of 29K out of pocket minus 12K back at close = 17K out of pocket, and no PMI. The rent on the property will support at least all the holding costs, but I am concerned about the 12K being taxable income to me personally. Thanks for your help.
I'm not sure if you've done this kind of deal before, but most likely the "cash back" will be considered a discount off the purchase price and not really cash returned to you. You will need to be sure that the lender will approve this, too. Some won't. They will instead lower the purchase price to reflect the discounted price.
Why not structure the deal as an 80-10-10? You finance 80% ($100K), with a 10% down payment ($12.5K), and a 10% ($12.5K) owner-carry 2nd. You also include a clause in the contract stating that the owner-carry 2nd will be sold back to you at/after closing for $500 as payment in full to support closing costs, repairs, etc. At least this way your intentions with the owner-carry 2nd are out in the open (i.e. the bank will know about it).
In a nut shell:
100K financed + 12.5K down payment + $500 for owner 2nd = 113K to owner at closing. Your out of pocket expenses = 13K plus closing costs. There's no PMI and everyone is happy!
With a "purchase price" of $125K and a seller "rebate" of $12K, your true purchase price is $113K.
The IRS will look at the "rebate" as a reduction in the purchase price, and not as taxable income. This also means that your initial cost basis for this property is really $113K, so your depreciation and future capital gains will be calculated from this starting point.
[quote]
On 2003-05-08 12:22, KEA wrote:
Why not structure the deal as an 80-10-10? You finance 80% ($100K), with a 10% down payment ($12.5K), and a 10% ($12.5K) owner-carry 2nd. You also include a clause in the contract stating that the owner-carry 2nd will be sold back to you at/after closing for $500 as payment in full to support closing costs, repairs, etc. At least this way your intentions with the owner-carry 2nd are out in the open (i.e. the bank will know about it).
In a nut shell:
100K financed + 12.5K down payment + $500 for owner 2nd = 113K to owner at closing. Your out of pocket expenses = 13K plus closing costs. There's no PMI and everyone is happy!
KEA - I like this strategy, however it sound like there may be $12k of debt forgiveness income (12.5K note forgiven for $500) to the purchaser (although the IRS may not be so quick to pick up on it unlesss they are looking).
Is this arragement commonly used? Is there more to this?
Depends upon how the deal is structured. Give us a specific example and we can respond with more authority.
Let's take a hypothetical example. You find a seller willing to take back up to 25K on a second mortgage to sell his 100K property.
You agree to purchase for 100K, using 80% financing provided the seller takes back a 25K second mortgage note. In effect, you are purchasing the 100K property with 105K in financing. After the seller is paid, there is 5K left on the table that goes into your pocket.
In this example, your 5K cash back at closing is not taxable income. Instead it is borrowed money that must be repaid.
Dave
I am looking at a property that the owner is asking 125K. It should appraise for at least that. He is willing to pay for some portion of the closing costs. I plan to offer him 125K with 12k back in cash to me, at closing, in lieu of him paying for some of the closing and my negotiating the asking price. My experience has been that the appraisal companies will only appraise a property for the sales price, and not a dollar more. If the sales price is 125k and I am essentially only paying 113k, I may be able to utilize some of the equity towards another purchase, and get a mortgage without PMI for less than 20% down.
Purchase price 125k (20% down=25K) plus closing costs 4k for total of 29K out of pocket minus 12K back at close = 17K out of pocket, and no PMI. The rent on the property will support at least all the holding costs, but I am concerned about the 12K being taxable income to me personally. Thanks for your help.
I'm not sure if you've done this kind of deal before, but most likely the "cash back" will be considered a discount off the purchase price and not really cash returned to you. You will need to be sure that the lender will approve this, too. Some won't. They will instead lower the purchase price to reflect the discounted price.
Roger
Why not structure the deal as an 80-10-10? You finance 80% ($100K), with a 10% down payment ($12.5K), and a 10% ($12.5K) owner-carry 2nd. You also include a clause in the contract stating that the owner-carry 2nd will be sold back to you at/after closing for $500 as payment in full to support closing costs, repairs, etc. At least this way your intentions with the owner-carry 2nd are out in the open (i.e. the bank will know about it).
In a nut shell:
100K financed + 12.5K down payment + $500 for owner 2nd = 113K to owner at closing. Your out of pocket expenses = 13K plus closing costs. There's no PMI and everyone is happy!
HTH. Just my .02 worth.
[addsig]
mgraval
With a "purchase price" of $125K and a seller "rebate" of $12K, your true purchase price is $113K.
The IRS will look at the "rebate" as a reduction in the purchase price, and not as taxable income. This also means that your initial cost basis for this property is really $113K, so your depreciation and future capital gains will be calculated from this starting point.
Thanks All!!! Glad I asked..Good Info
[quote]
On 2003-05-08 12:22, KEA wrote:
Why not structure the deal as an 80-10-10? You finance 80% ($100K), with a 10% down payment ($12.5K), and a 10% ($12.5K) owner-carry 2nd. You also include a clause in the contract stating that the owner-carry 2nd will be sold back to you at/after closing for $500 as payment in full to support closing costs, repairs, etc. At least this way your intentions with the owner-carry 2nd are out in the open (i.e. the bank will know about it).
In a nut shell:
100K financed + 12.5K down payment + $500 for owner 2nd = 113K to owner at closing. Your out of pocket expenses = 13K plus closing costs. There's no PMI and everyone is happy!
KEA - I like this strategy, however it sound like there may be $12k of debt forgiveness income (12.5K note forgiven for $500) to the purchaser (although the IRS may not be so quick to pick up on it unlesss they are looking).
Is this arragement commonly used? Is there more to this?
-Adam