Tax question regarding rehab costs

[Alex K.]

I have an unusual situation:

I own a property which is under contract to sell to my tenants on Nov 1. This happened because they wanted to buy it immediately after I bought it but there is a 3 month deed restriction from FNMA.

The tenants are fixing the place up. The rental agreement states that I am to receive copies of receipts for all work done to the property. My plan was to use these receipts to increase my basis value of the property. Since the repairs are being done while I still own the property, I should be able to do this, right? Does it matter that I am not the payee on the receipt? For example the plumbing bill is $3400 (install RV water/sewer/electrical hookups) and it shows the date and the property address, but my tenant's name on it. Will the IRS frown upon this?

I don't see how the tenants could use the receipt to increase their basis value since they did not own the property when the work was done.

[Bill Walston]

Originally posted by Alex K.:

I have an unusual situation:

I own a property which is under contract to sell to my tenants on Nov 1.. . The tenants are fixing the place up. The rental agreement states that I am to receive copies of receipts for all work done to the property. My plan was to use these receipts to increase my basis value of the property. Since the repairs are being done while I still own the property, I should be able to do this, right? Does it matter that I am not the payee on the receipt? For example the plumbing bill is $3400 (install RV water/sewer/electrical hookups) and it shows the date and the property address, but my tenant's name on it. Will the IRS frown upon this?

If you are allowing them to make the renovations in lieu of rent you probably have a case for increasing your basis in the property. You would, of course, have to include the value of the renovations in your gross rental income. If the tenants are making the improvements in anticipation of their purchase and you are NOT recognizing the value are rental income, then no, you may not increase your basis.

Originally posted by Alex K.:

I don't see how the tenants could use the receipt to increase their basis value since they did not own the property when the work was done.

But they DO have a binding contract to purchase the property. Accordingly, they would have a valid argument for including the value of the renovations in their basis calculation.