Contribution to Tax basis
I'm in the process of buying a property to be used as a primary residence. I'm curious as to what my tax basis will be when considering the following:
Sale price $200k with $10k back for closing costs and a separate $5k in excrow from seller for repairs.
Does the Closing cost help or repair money count in my initial basis? The seller received $185k but I'm not sure the IRS will consider that my basis.
Basis = (Purchase price) + (settlement/closing costs - prepaid escrows - prorated property taxes - interim interest - loan points) - (seller contributions)
In other words, your initial basis is 200K minus the seller contributions giving you 185K. To this number add your closing and settlement costs that you paid out of pocket. Do not include prorated property taxes, interim interest, loan points, or prepaid escrows. These items (except hazard insurance) can be deducted on your schedule A if you itemize your tax return.[ Edited by DaveT on Date 06/24/2003 ]
Thanks for the help Dave!
Just as an FYI- if you are going to hold the property and live in it for over 2 years, unless you make $250k profit, the basis won't matter. The basis matters in a conversion to commercial or investment use, or if you buy for business use. In addition, you can and should add any repairs that will substantially improve the value of the home, such as central air, skylights, a shed, carport, sprinkler system to the basis. Make sure you keep all receipts in case you do convert to rental. After conversion these types of improvements must be depreciated just like the house.
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