Rent-back (post-settlement) occupancy agreement

[Opus 17]

It's not a "favor" if you get paid, and that income has to be dealt with, either as taxable rental income, or as a reduction in basis.

[zhongjp058]

@Opus 17 Thanks a lot for your detailed explanation. Yes, I want to treat it as the reduction of the home purchase price. I trust you but just want to make sure this option is safe without paying penalty to IRS, as I did not see IRS reference which states this is an option.

I went through Publication 523, page 13, Worksheet 2, Item 5, Determine your “basis adjustments” - which are the list that I can subtract from the cost basis. But I did not see an item regarding to the rent-back income. Also checked Publication 551, Basis of Assets, and did not find anywhere states it.

Can you help again to show me the section in IRS publication which mentions this rent-back income can be treated as reduction of the cost basis? Appreciate your help.

[Opus 17]

It's just a general principle that money you "receive" as part of buying the house lowers your cost.  That applies to the listed examples like abstract fees and transfer taxes, but it would also apply to non-listed items like a rebate of the real estate commission for example, or if the bank rebated the mortgage application fee if you met certain conditions in some kind of advertised promotion.  (The publication is giving examples, not a comprehensive list.)  Lowering your cost accounts for the taxability of the income without actually having to report it as taxable income.

If you want a specific reference for rent-backs, you probably need to look for something like a tax court case, Lasser's tax guide or an article in the Journal of Accountancy or some such.  Maybe @Critter#2 or @Hal_Al can make a suggestion.  I just think you are over thinking this.

[zhongjp058]

@Opus 17 Thank you very much for your answers! It helps a lot! Have a great weekend!