If the cash back at closing is coming form any type of loan (which it usually is)then you don't have to claim any of it for taxes. You will only have to claim income on this when you sell the property and then your capital gains will be your sale price less purchase price, and expenses including capital improvements.
Buying real estate is like buying stock -you don't pay taxes until you sell. And even then you could roll it into a 1031.
Well, what im doing, is buying a house worth 430, for 350, getting 25k back at closing, so on paper im buying it for 375. and yes, its being paid by a loan
There is one additional thing to consider re: cash back - if you are buying an income property and you are receiving prorated rent credits at closing, these need to be reported as rental income on your Schedule E when you file your taxes. Of course, this income is offset be your expenses.
Lets say you take out $50,000 on a cash out refi and deposit it in your bank-- do you pay income tax on it -- absolutely not.
There is a difference between cash flow and income. If you don't believe me then talk to your accountant---- your cash back at closing is not income--you don't make any income other than rent until you sell.
If this is correct, Isn't possible to say -buy a property for $200,000 on a 100% mortgage and receive $50,000 cash out. Later you sell the property for the same $200,000. You would make a $50,000 gain on the property but you would not be taxed on any of it because it was part of the purchase price?
quote:
Well, what im doing, is buying a house worth 430, for 350, getting 25k back at closing, so on paper im buying it for 375. and yes, its being paid by a loa
Seller is selling this property to you for 350, but lender think you are buying the prop for 375. That is ilegal. That means you have two different contracts. If $25000 is for repairs, it has to be specified in the contract. However, if you do that, most lenders will not approve it, since there are too much deferred maintenance involved.
I think you're jumping the gun, calling what he is doing illegal. You don't know the terms or conditions of the contract, so blindly saying that what he is doing is illegal is foolhardy, at best.
However, you are correct that if the lender is not aware of the $25K in discount, then the transaction would be considered loan fraud.
It is more than shady. Like I explined earlier, if the seller is paying any money to buyer to repair the property, it has to be spelled out on the contract.
smiley, that is not true about most lenders not allowing cah for repairs. it depends on the lender. some will let you but are very strict about how it is used. meaning, they will make escrow hold it untill the repairs are done and receipts are shown, then they will pay whoever for the repairs. some wont do that at all and will not allow cash back for any reason. and some will let you have it for repairs and after the repairs are done you can keep the leftover. it really depends on the lender, make sure someone checks with the underwriter to be sure. good luck.
What's illegal about it? The seller wants to net 350. In order to do that, you take out a larger loan to finance in repairs. All you are doing is structuring a contract to net the seller what they want. If the appraised value was somehow inflated, then I'd say the contract is questionable, but as long as there is an accurate and legit appraisal, there is absolutely nothing wrong with agreeing to pay a premium to get cash back at closing. Technically, the sales price truly is 375 and the contract should reflect this, less a 25K seller credit. Perfectly legal.
Quote:
smiley, that is not true about most lenders not allowing cah for repairs. it depends on the lender. some will let you but are very strict about how it is used. meaning, they will make escrow hold it untill the repairs are done and receipts are shown, then they will pay whoever for the repairs.
I never said that most lender will not allow repair cost to be paid to buyer from seller. It all depends on how extensive the deferred maintenance will be. $25000 is awfully a lot of money for repair. It depends on the conditions of property. If $25000 repair is needed, most of time, the lenders will suggest you to get rehab loan instead of conventional mortgage loan. [ Edited by SmileyFace on Date 11/02/2004 ]
If the cash back at closing is coming form any type of loan (which it usually is)then you don't have to claim any of it for taxes. You will only have to claim income on this when you sell the property and then your capital gains will be your sale price less purchase price, and expenses including capital improvements.
Buying real estate is like buying stock -you don't pay taxes until you sell. And even then you could roll it into a 1031.
Hope that helps
Well, what im doing, is buying a house worth 430, for 350, getting 25k back at closing, so on paper im buying it for 375. and yes, its being paid by a loan
There is one additional thing to consider re: cash back - if you are buying an income property and you are receiving prorated rent credits at closing, these need to be reported as rental income on your Schedule E when you file your taxes. Of course, this income is offset be your expenses.
Birdog-- Your in good shape then, none of your cash back is considered income--When you sell then you pay your taxes.
tmpringle -- your right any rents will be taxable.
ok, well in that case, when if shows up in my bank account, what do I said it is, and where it came from
You say it came from a loan..
Lets say you take out $50,000 on a cash out refi and deposit it in your bank-- do you pay income tax on it -- absolutely not.
There is a difference between cash flow and income. If you don't believe me then talk to your accountant---- your cash back at closing is not income--you don't make any income other than rent until you sell.
If this is correct, Isn't possible to say -buy a property for $200,000 on a 100% mortgage and receive $50,000 cash out. Later you sell the property for the same $200,000. You would make a $50,000 gain on the property but you would not be taxed on any of it because it was part of the purchase price?
You pay income tax based on income earned, minus expenses = taxable income.
You pay capital gains tax based loosely on your purchase price vs sales price. There are a few other factors here too.
If you get cash back at closing by taking out a larger loan, the money is simply proceeds of a loan.
If you are getting prorated rents, this is income.
If you are getting security deposits, this is simply a liability.
Awesome, thanks alot guys, I appriciate it
To thecreativeinvestor--
That would not work because when you sell you would half to pay off that $200,000 mortgage.
By the way, what are doing is considered ilegal.
Why ilegal? I'm simply getting money from the owner for repairs, carrying costs, and security
SmileyFace,
Which one is illegal?
Elaborate, please.
quote:
Well, what im doing, is buying a house worth 430, for 350, getting 25k back at closing, so on paper im buying it for 375. and yes, its being paid by a loa
Seller is selling this property to you for 350, but lender think you are buying the prop for 375. That is ilegal. That means you have two different contracts. If $25000 is for repairs, it has to be specified in the contract. However, if you do that, most lenders will not approve it, since there are too much deferred maintenance involved.
Smiley,
I think you're jumping the gun, calling what he is doing illegal. You don't know the terms or conditions of the contract, so blindly saying that what he is doing is illegal is foolhardy, at best.
However, you are correct that if the lender is not aware of the $25K in discount, then the transaction would be considered loan fraud.
Roger
What is the honest/correct ways to construct a deal like that?
Is'nt having 2 contracts shady? Why/how would that be ok?
It is more than shady. Like I explined earlier, if the seller is paying any money to buyer to repair the property, it has to be spelled out on the contract.
"To thecreativeinvestor--
That would not work because when you sell you would half to pay off that $200,000 mortgage."
Hey title dude!
Actually, he would have a 250k loan to pay off.[ Edited by regal on Date 11/01/2004 ]
smiley, that is not true about most lenders not allowing cah for repairs. it depends on the lender. some will let you but are very strict about how it is used. meaning, they will make escrow hold it untill the repairs are done and receipts are shown, then they will pay whoever for the repairs. some wont do that at all and will not allow cash back for any reason. and some will let you have it for repairs and after the repairs are done you can keep the leftover. it really depends on the lender, make sure someone checks with the underwriter to be sure. good luck.
What's illegal about it? The seller wants to net 350. In order to do that, you take out a larger loan to finance in repairs. All you are doing is structuring a contract to net the seller what they want. If the appraised value was somehow inflated, then I'd say the contract is questionable, but as long as there is an accurate and legit appraisal, there is absolutely nothing wrong with agreeing to pay a premium to get cash back at closing. Technically, the sales price truly is 375 and the contract should reflect this, less a 25K seller credit. Perfectly legal.
Quote:
smiley, that is not true about most lenders not allowing cah for repairs. it depends on the lender. some will let you but are very strict about how it is used. meaning, they will make escrow hold it untill the repairs are done and receipts are shown, then they will pay whoever for the repairs.
I never said that most lender will not allow repair cost to be paid to buyer from seller. It all depends on how extensive the deferred maintenance will be. $25000 is awfully a lot of money for repair. It depends on the conditions of property. If $25000 repair is needed, most of time, the lenders will suggest you to get rehab loan instead of conventional mortgage loan. [ Edited by SmileyFace on Date 11/02/2004 ]