If I buy a condo for $280K + $46K for seller's HOA special assessment, can I use $336K as selling price and have $46K paid off by attorney as part of closing?

[wrl]

I'm buying a vacation condo for $326K.  This includes $280K to seller and $46K for a special HOA assessment the seller owes for exterior building resurfacing/updating and replacing windows and sliders with stronger, more hurricane-resistant ones.  I would prefer to use $326K as sales price and have the attorney cut a check to HOA as part of closing costs.  I would have $326K as my future sale basis.  Would seller be able to use $280K (less his other usual closing costs) as a basis for determining his capital gains in this scenario?

I am paying cash, so mortgage issues are not at play.  

I use TurboTax, but this is not a product question.    

[SweetieJean]

Special assessments that are clearly identified as being for a capital improvement can be added to cost basis. Capital improvements include such projects as upgrading the electrical wiring throughout the building, installation of a new HVAC system, replacement of the building roof, etc.

Repairs do not add to the basis.

[SweetieJean]

"Would seller be able to use $280K (less his other usual closing costs) as a basis for determining his capital gains in this scenario?" Seller needs to ask his own tax advisor that question. It is not your concern.

[wrl]

It is my concern, as I told seller I would do this the way he would need in order for him to avoid excessive cap gains.  He would prefer $280K sales price and me to pay assessment.  I would prefer the other way if it didn't make any difference re: his cap gain liability.  

[TaxGuyBill]

Which one of your is actually assessed?  I would think the assessment applies to whoever owned the property on a specific date.

[SweetieJean]

You mentioned an attorney. Ask him/her.

[wrl]

SweetieJean ... I forgot to thank you for your posts on my question.  I do appreciate them and you very much.  Thanks!

[wrl]

I made my offer ... $280K + $46K a few days ago.  We haven't settled on attorneys yet....  I was hoping to get a good idea about this prior to getting an attorney's opinion so as to be somewhat informed beforehand.   Tentative closing date is 2 1/2 weeks from now.  Just trying to figure out the way to do this that works best and is simplest for both of us.  The assessment currently belongs to the seller.  

[TaxGuyBill]

The legal paperwork may determine who owes and pays the Assessment, but the end result should be the same any way it is done (assuming the Assessment is entirely for improvements)

If the Assessment belongs to the seller, this is how I see it:

You will purchase it for $336,000.  That is your Basis, that is the seller's sales price.

However, because the Assessment belongs to the seller, it is as if the seller is paying off the Assessment.  That means the seller's Basis in the property increases by $46,000 (assuming the entire Assessment is for improvements), which effectively gives the same result for the seller (the same result as if the seller's Basis was NOT increased by the Assessment, but with a selling price of $280,000).

Does that make sense?

[wrl]

This does make sense, TGBill, and it's the way I'd like to do it.  An issue is that I'm not sure how much of the assessment would be considered for maintenance vs improvement.  I'll have to talk with the HOA to get a better idea about this.  Deal may fall apart if seller (or eventually me) gets saddled with too much cap gains tax.  Thanks for taking the time to help me with this!   

[Opus 17]

As best I can tell, whatever you pay to close the deal is your purchase price and is used to figure your capital gains whenever you sell, including overdue taxes, fees, or anything else.  For example, it clearly states in publication 523 that if you pay the seller's overdue property tax bill, you can't deduct the property taxes on your tax return, instead you consider the price part of your basis.  It seems that logic should equally apply whether the assessment is for taxes, repairs or maintenance.  (Consider, for example, if you asked the seller to make certain repairs or else decrease the price.  If he did not decrease the price and instead made the repairs, you don't now have to consider the cost of the repairs as excluded from your basis just because they were repairs. Repairs you make after closing are not part of your basis of course.)

You pay whatever it takes to close the deal, and that is your cost basis, including purchase price, attorney and bank application fees, appraisal fee, inspections, and buyer concessions.

I agree that the seller can make certain adjustments to their basis even if you paid for the maintenance, and the seller has to know the difference between repairs, other non-deductible HOA costs, and the improvements.  But you don't need to know that.

I also don't understand what capital gains has to do with it now.  You will pay capital gains whenever you sell, hopefully at least 2 years from now, and the seller's capital gains are none of your business.  If the seller also wants you to pay them extra to cover their own tax, then I hope this condo is worth it, it sounds like a bad deal to me so far.  But in the end, any money you pay to the seller is part of your cost basis, even if it is cover their income taxes.  (From the seller's point of view, extra money you pay them is part of the purchase price, which further increases their gains and tax, so it's Xeno's paradox, but again, that's not your problem.)

[Anonymous]

basically your saying that you want the sales price to be $326,000 on the closing, but one way or another you get back the $48K the seller owed.  i'll give you a choice,  treat the $46K as a reduction of basis - which is the corrrect way or report the basis as $326,000 and pick up $46,000 as taxable income - the wrong way. 

[wrl]

I not sure you quite understood the details of my explanation.  The two options I was questioning were:  1) Have the sales price be $280K, I pay the $46K assessment as a separate transaction or 2) I pay the seller $326K (which would be my basis in the condo) and the seller would pay the $46K assessment, which is technically his responsibility to begin with.  My question was to the effect that if we do 2) and have the seller's assessment of $46K paid at closing as part of the seller's closing costs, would the seller then be able to use his net return after closing (<$280K) to determine his capital gain from the sale?  I think the answer to that question has been established as "No".

From other TurboTax expert answers, I think the key issue is whether or not the assessment is considered for maintenance/repairs or improvements/upgrades.  If the answer is for improvements, the $46K would count as an increase in basis for whomever pays it.  If for repairs, it would not.  Treating the $46K as a closing cost wouldn't help one way or the other.  With answers like yours and especially SweetieJean's and TaxGuyBill's, I know what can and can't be achieved at closing.  Thanks so much for your time and thoughts on this matter.    

[Opus 17]

You, as the buyer, are paying $326K. That's your purchase price, and your cost basis for when you eventually sell.  Period.

I don't know why the seller's tax situation is any of your business, or why you are getting involved.  They can get their own tax expert to advise them.  Unless this is a relative or personal friend, the seller is likely to get very angry if you give them advice from the internet and it turns out to be wrong if they are audited.  I would strongly suggest you stay away from giving tax advice to the seller.

I generally agree that the seller can treat $326K as the sales price, and can also treat the portion of the HOA assessment that is improvements, as an adjustment to their cost basis.  Determining what part of the assessment is dues (not deductible or a basis adjustment), repairs (not deductible or a basis adjustment) improvements (a basis adjustment) and arrearage fees (not deductible or a basis adjustment) is best left to the HOA's accountant or treasurer.  The HOA should probably provide a detailed breakdown of the assessment (to all the owners, as a matter of routine).  But this has nothing to do with you and I suggest you stay away from giving the seller tax advice.

[Opus 17]

The alternative, is for you to pay $280K to the seller and pay the $46K directly to the HOA.  In that case, the seller does not get the basis adjustment, but they are selling for a lower price, so their gains are the same either way.  You have a lower cost basis but then you get the basis adjustment.

If you write two separate checks, I rather think this second treatment is more correct, even though the net effect is similar.  And you probably do want to write two checks to make sure the HOA gets paid and the seller doesn't run off with the money leaving the bill unpaid for you to pay again.  

However I am not an accountant, and neither is @SweetieJean as far as I know.  @TaxGuyBill may be an accountant, but he's not going to represent you if you get audited.  You may want to seek professional advice.