Tenant relocation fee

[jlo90275]

Dear Experts, I am selling my income property. The buyer asked us to credit him $15,000 relocation fee to vacate a specific unit at the close of escrow. However, he prefers that we just list “credit of $15,000 to buyer” in the closing statement and not mention “relocation fee”. Two questions: 1) Is it OK not to specify what the credit is for in the closing statement? 2) Will it cause any trouble if IRS audits us? Thanks!

[NCperson]

@jlo90275 I am confused.  Is your buyer currently your tenant? what specific unit is this? where he is living currently?  why did you agree to what is in effect a $15,000 reduction in the sales price? 

[Opus 17]

For tax purposes, your selling price is the net after all credits.  The IRS doesn't care if you sell for $100,000, or for $115,000 with a "seller credit" of $15,000.  The selling price for tax purposes is $100,000 either way.

The bank might care, since using an inflated selling price might allow the buyer to get a bigger mortgage than they should, but that's between them and the bank.

[NCperson]

The IRS may care (on the buyer's tax return) as a relo incentive payment would be reportable income to the buyer

[jlo90275]

@NCperson  The buyer is not my current tenant. This unit that he wants to vacate is one of the units in the apartment building that we are selling in CA. He plans to move in that unit after close of escrow so that he can apply for owner-occupied loan. The $15,000 is the credit for relocation fee for the current tenant in that unit. However, the buyer does not want us to show in the counteroffer or closing statement that $15,000 is credit for relocation fee nor for repairs credit as we are selling the property as-is. He just wants us to us a generic term “credit of $15,000 to buyer” but we are not sure if it will cause us any issues with future potential IRS audit. 

[Opus 17]

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@jlo90275 wrote:

@NCperson  The buyer is not my current tenant. This unit that he wants to vacate is one of the units in the apartment building that we are selling in CA. He plans to move in that unit after close of escrow so that he can apply for owner-occupied loan. The $15,000 is the credit for relocation fee for the current tenant in that unit. However, the buyer does not want us to show in the counteroffer or closing statement that $15,000 is credit for relocation fee nor for repairs credit as we are selling the property as-is. He just wants us to us a generic term “credit of $15,000 to buyer” but we are not sure if it will cause us any issues with future potential IRS audit. 

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In that case my original answer is confirmed.  For IRS purposes, the selling price is net of any credits.  If you sell for $100,000, or for $115,000 with a give-back credit, the net price is still $100,000.    Or, to explain it another way, if you listed the property for $100,000, and the buyer negotiated you down to $85,000; or if the buyer agreed to $100,000 but negotiated a $15,000 credit, either way your net sales price is $85,000.  That's all the IRS cares about.)

This is mostly a way for the buyer to show a higher price on his mortgage application (if he needs one) or maybe just to keep the property values up in the neighborhood.  

[NCperson]

@Opus 17 no issue on the seller side of this transaction, but from the buyer's perspective, an inducement to vacate a property, isn't that taxable income? 

if a tenant in a property is induced to leave, which appears to what is occurring here, isn't that is taxable income to the tenant?  I wonder if that is why the tenant (also the buyer) wants to mask the true purpose of the inducement - so it's not reported as current year income (1099-MISC) . 

[Opus 17]

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@NCperson wrote:

@Opus 17 no issue on the seller side of this transaction, but from the buyer's perspective, an inducement to vacate a property, isn't that taxable income? 

if a tenant in a property is induced to leave, which appears to what is occurring here, isn't that is taxable income to the tenant?  I wonder if that is why the tenant (also the buyer) wants to mask the true purpose of the inducement - so it's not reported as current year income (1099-MISC) . 

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See above, the buyer is not the tenant.  The buyer wants to move into the unit the tenant is currently living in (the nicest one maybe) to qualify for a owner-occupier mortgage.

I'm unclear on how the buyer gains advantage specifically from not issuing a 1099, other than saving a $5 e-filing fee.  It seems more like a way to inflate the purchase price for purposes of obtaining that mortgage.  To the extent that the payment would reduce his net income (and cash flow) on the property, that could also implicate mortgage shenanigans. But I also imagine that for a commercial mortgage where Amy buys a multi-unit apartment building from Bob, the bank is going to need Bob's PNL for the property to make a mortgage decision, since Amy won't have any history in the property.  By the time the incentive is recorded in Amy's books, the mortgage is already approved.  There could be shenanigans going on, but I don't quite understand how.  And that's not @jlo90275 's problem.  They just need to keep their own books clean and make sure the check clears before they hand over the keys. 

[Opus 17]

I will add, however, that in the event the buyer is a more experience landlord and has done this before, and the seller may be relatively inexperienced, the seller should have an attorney and ask all these questions of the attorney.  The seller should have an attorney anyway, since this is likely a significant investment. 

[NCperson]

one more time: 

@jlo90275 

<<The $15,000 is the credit for relocation fee for the current tenant in that unit. >>

How you wrote this simply is not clear - is this the current tenant of YOUR property that you are selling to this buyer? And the buyer is going to incent the tenant to leave, which really means you two mutually agreed to incent the tenant to move to facilitate the trade? If so, I would be a little weary of that involvement as it gets murky who is responsible for issuing the 1099-MISC to the tenant - the buyer or the seller.   The tenant should report that money as income (but not your concern whether it occurs or not)

Why does the buyer care how it is reflected on the closing statement? he doesn't have any income to report on his tax return in any event. 

Does the the lawyers / title agent mind obfuscating the true intent of the money transfer? I'd ask.  

[Opus 17]

@NCperson 

Did you miss this post?

"The buyer is not my current tenant. This unit that he wants to vacate is one of the units in the apartment building that we are selling in CA. He plans to move in that unit after close of escrow so that he can apply for owner-occupied loan. The $15,000 is the credit for relocation fee for the current tenant in that unit."

From the seller's point of view, the buyer is saying "I agree to your price, but I want a discount--and instead of reducing the official price, I want you give me the money in cash so I can use it to push out the current tenant."  

It's basically the same as when my ex-wife sold our house and the buyer said, "Repair this issue or give me $1000 back at closing so I can repair it."  The buyer doesn't want to reduce the selling price by $1000, because that would only save $5 a month in P&I, the buyer wants the extra cash.  But from a capital gains and depreciation recapture point of view, it reduces the sale price.

The reason to leave it off the closing statement is so the lender doesn't see that the buyer is getting cash back from the sale, because that cash ultimately comes out of the new mortgage.  But that is a problem between the buyer and their bank, not the buyer and the seller.    

[NCperson]

@Opus 17 I saw your post, but do not necessarily agree with whom the relationships are in the OPs post and which property the OP is talking about.  I appreciate you have an interpretation of the relationships, but my is different.  

The OP really needs to re-write and clarify which property the tenant is living in, etc.  

As I have been in the mortgage business, there is something 'fishy' that the buyer wants to obfuscate the true purpose of the seller credit.  It's a red flag, esp. if this is the seller's tenant that is getting the $15,000 in which case the seller is party to that obfuscation. Laundered Money?  Borrower fraud?  

we can agree, as you also stated it, the OP should seek advice from the closing title agent or the closing lawyer.  

[NCperson]

@Anonymous_ - right.... the buyer is not the tenant of the unit being sold, I agree with that.

But it appears the tenant under discussion is the seller's tenant.  The buyer wants the tenant out so the buyer can obtain owner-occupied financing.  That is my interpretation of the OPs statement.  

the "HE" is the buyer and the "that" is the property that is being traded.  

<<He plans to move in that unit after close of escrow so that he can apply for owner-occupied loan.>>

If true, then the question for the lawyer / closing agent: as the seller am I taking on any risk by shading the truth on the reason for the seller credit?