Is this a capital gain?

Question

I'm involved in an assignment or a double closing. Party A is selling her home ( personal not eligible for 1031 I dont think) for 375,000 to party B, then B will sell it or assign it to Party C for a FEE of $50,000. 
I'm guessing Party B has to pay Capital Gains tax on $50,000 whether this is an assignment OR a double closing, is that right?? Am I correct in thinking this will be a Capital Gain? or is it Ordinary income. What form is used to report these type of fees, Sch D, or F 4797 or what else?  Is there a more tax efficient way to do this?  Thanks

Account Closed · Answer

In all cases B and C folks are dealing with short term transactions. For the most part there is no difference in the tax impact of a assignment vs. double close given the short time period. Maybe a difference in exposure to FICO but...

Focus on doing a clean deal. Worry about what you are buying if you are C and let the others sort out their taxes. You do not know enough about them to even suggest how a transaction might impact their tax position. I would not bother bringing it up. It is more likely to panic someone than to help.

John Corey

N/A N/A · Answer

What can I use as the basis of this house, the assigned contract is 375,000, plus I paid a finders fee of 180,000, (yes and maybe I am nuts) total cost of house was 555,000.  But it was recorded in town hall as 375000.   Am I doing something illegal here?  Please recall, this is my personal residence and I do not normally do anything like this.
Thanks

Joe Wilson · Answer

No, you are not doing anything illegal, partaining to the purchase of the home.  The original cost basis will be the actual cost of the home ($375,000) plus the finder's fee ($180,000) plus any other buyer-paid closing costs that are not amortized or expensed.

Amortized costs from the closing that are not included in basis are the points paid on the loan which is amortized over the life of the loan.  
Expensed costs from the closing that are not included in basis are taxes.  You should have a credit for taxes paid on your closing document.  Either he has already paid the taxes for the year and you have to add your pro-rata share on the closing and then you will deduct them on your taxes or he has not paid them yet and you will get a credit to reduce the purchase price by the pro-rata share he should have paid and then you will have an offset on the entire tax bill paid so your deduction will only by your pro-rata share for the year.  In any case, both of those items on your closing statement will adjust your basis.

This is a pretty detailed general accounting of your basis and it would be wise to, at a minimum, keep the closing document in your files to determine the basis at a later date when necessary.

Joe

Account Closed · Answer

No comment on the fee you paid. :roll:

The tax basis will include costs of acquisition. It might be best to just have a CPA do the calculations and provide advice if there are some non-traditional expenses. The fee you paid should be included but it will depend a bit on how the fee was documented.

John Corey

Joe Wilson · Answer

You can read about personal residence gain exclusion here =>http://www.irs.gov/publications/p523/ar02.html#d0e1939

Depending on the other party's situation, he may not be able to exclude any of it.  If they lived in the house 0 of 730 days, then the exclusion is 0 and they would recognize all of it as gain.  The intent of this code is for people to become homeowners and not recognize gain on their personal investment/residence.  It is not for individuals who buy and sell homes as investments or flips which is what the other party is doing in this case (a flip).

If you are party C in your scenario, then there is no tax implication to you.  Unless you stated that you would give party B $50,000 after-tax for his troubles of reselling the home to you.

Joe Wilson · Answer

no FICA.  It is either a gain on sale of personal residence where the owner/occupier stayed in the house for less than the required time so the amount to be excluded would be prorated.  To exclude $50,000 of the $500,000, the seller (person B) would have to be there for about 2 months, but if it were closed both times on the same day, then there would be no exclusion and the gain shown on the Sched D would be short term and subject to ordinary rates and no FICA.  The other side of the coin is that you pay a $50,000 fee to person B and it will be non-SE other income and taxed at the ordinary rate.

N/A N/A · Answer

Thanks for that reply RECPATAXMAN.  I understand it.  I was unaware  that any of the gain could be excluded by  prorating on a less than 2 year coccupancy.  Can you direct me to some reading on that?   Thanks again.

N/A N/A · Answer

Here’s the rest of the story.  I am party C.   I saw a for sale sign on my “dream home”,  when I called the realtor, he said it was under  contract.  I said I’d pay the buyer “B”  a $50,000  bonus/fee  if he would sell it or assign it to me.  (he’s now looking for another house for he and his wife).
Since this deal consist of  entirely personal residences, without the intent of a profit   I‘m thinking this situation would NOT require a License ?
“B” has agreed,  but we don’t know if we should use the assignment OR a double closing method to minimize Income tax consequences or would either method  end up the same for “B‘   ??   Thankyou

N/A N/A · Answer

Well, this is an ALL CASH deal so that won't be a problem.  I still don't know wether to assign or double close and the tax consequences of each.    ?????     or is there another way to do it without having to pay capital gains?   thanks

Jon Holdman · Answer

Since this is all for primary residences, and you're probably using a conventional lender, you may not be able to do a double close.  Conventional lenders now often have seasoning requirements that require the seller be on title for some period of time, 90 days, six months, or a similar period.

They may also question the true value, if they see either that its being re-sold at a 13% markup very quickly or a $50K credit to an uninvolved (from their perspective) on the HUD-1.
Jon