A hospital in our area is purchasing peoples homes and they are paying them $$ to sign a confidentiality agreement regarding the sale terms. They are telling them that the $$ is not taxable. It is not included on the settlement statement for the home purchase/sale it is just given to them in a separate check. They are also paying out funds for access to the property. Is this taxable?
It depends. If the person(s) lived in the home and were single, any profit from the sale of the home under $250K is tax free. If they were married and lived in the home the figure is $500K. They have to have lived and owned the home for two of the previous five years. Missy Doyle
Does the agreement include a clause saying that the fact these payments are being made is also confidential??? Stu
wrote
Hospitals don't give out the best tax advice now, do they.
It's taxable income, if not included in the capital gains of the house and otherwise exempted under Section 121. I'd want it on the closing statement to prove it's exempt under 121 (if that's the case) instead of an under the table transaction.
-- Paul Thomas, CPA snipped-for-privacy@bellsouth.net
Either the amouts are taxable or they are part of the sales proceeds where the nature of the property in the seller's hands determines taxability.
If the hospital is a 502(c)(3), it may not have to purchase tax stamps. Otherwise the sale price would be public knowledge making the nondisclosure agreement meaningless.
How much are they paying for the nondisclosure agreements? Are they buying the houses or just getting options to buy?
If the payment is not on the settlement statement, it is ordinary income which is obviously taxable to the payee. So if they make you an offer, ask them for a signed letter from a tax attorney, a CPA, or an Enrolled Agent stating that they researched it and have concluded it is not taxable. Also ask for 50% more for the agreement than they are offering.
There doesn't appear to be much authority that I can find that covers confidentiality agreements outside of the context of noncompete agreements made in the context of selling a trade or business. However, it strikes me that the payment for the confidentiality agreement should constitute ordinary taxable income to the recipients because, essentially, the buyer is paying them to perform a negative service for it - namely, the hospital is paying for them to not say anything about the terms of the sale. That strikes me as comfortably analogous to compensation for services to be rendered, not in the context of an employer/employee relationship, and would constitute ordinary gross income to be reported on the tax return as "other income." It also strikes me that the hospital may be trying to pull a fast one by trying to make the payments deductible rather than capitalizing them into the cost of the property bought, which it must do because, under the INDOPCO case, these expenses appear to relate directly to the acquisition of the houses by the hospital.
Why is the hospital buying people's homes? Is it to buy up property to expand the hospital or is it because it is some kind of settlement for a lawsuit the homeowners brought against the hospital? If it is for expansion, then the income *may* be nontaxable under IRC section 121. If it is for a lawsuit settlement, then possibly the $$ is punitive damages which would be taxable. However, it appears the money is being paid not for the fair market value of the home but to keep them quiet, so I'd say it is ordinary income and should be reported on Form 1040, line 21.
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