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Income tax on "property repair allowance"?

I just closed on my first house today and almost everything went smoothly. Everything except for this sales agreement addendum that I signed shortly after the home inspection. I signed this addendum a month back for $6250 that would be paid by the seller to me as a "property repair allowance". That was fine. I went in to sign the closing papers today and the addendum was nowhere on any of the papers. My realtor told me that the seller would give me a check after everything was said and done. And he did. The thing I didn't like is that the closing agent and lender were not aware of this deal. This was a separate agreement outside their view. And now, I wonder about tax implications. Do I need to pay income tax or any other tax on this $6250? The money will definitely be used for repairs, for I have more than $6250 worth of repairs to do. Any help is greatly appreciated. Pat

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Reply to
patbird
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JMO here. From your description it sounds like this should have been handled the way such things are normally handled, as a part of the closing. Your realtor ill advised you to complete the closing and count on the seller's good will. Had the seller not forked over the money you'd have been forced to sue, get a judgment, and try to collect it.

I'd call it a reduction in price, which does reduce your basis. You could also call it a rebate, which also reduces your basis. In any event, it's not taxable. See IRS Publication 525.

-- Phil Marti Clarksburg, MD

Reply to
Phil Marti

wrote

Sounds like a reduction in your purchase price, or cost basis, to me. It's not taxable to you (as you paid for it in a higher purchase price), but it reduces your costs basis, until you add to the basis with the repairs/improvement expenses.

-- Paul A. Thomas, CPA Athens, Georgia

Reply to
Paul Thomas

So, you got a REBATE on the purchase price. Rebates are not considered income, merely a decrease in your cost basis.

Shouldn't be any income tax implications, but since the rebate is outside the formal sales agreement, you will probably pay more in "points" and transfer taxes (which are usually a percentage of sales price). The seller will pay more in commission.

What this is called (by the seller) is irrelevant, as you could spend the money on whatever you want. If used for capital improvements, however, your cost basis will be adjusted upward.

Reply to
Herb Smith

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