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Subject Author Date
Income tax on "property repair allowance"? patbird 11-04-2006
Posted by patbird on November 4, 2006, 10:35 pm
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 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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Posted by Phil Marti on November 6, 2006, 12:19 am
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> 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.

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.

> 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.

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

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Paul Thomas on November 6, 2006, 12:19 am
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> 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.

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

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Herb Smith on November 6, 2006, 12:38 am
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patbird@gmail.com wrote:

> 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.

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

> 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.

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.

> 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.

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.

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

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