Can the concession to a buyer be deducted from the seller's cost basis (the capital gain I'd have to pay taxes on)? I'm selling my home.

[cuantoes]

I'm selling my home and need to know if I will have to pay capital gain taxes on a concession to the buyer.

[DoninGA]

What type of concession?
The gain on the sale of a personal residence is calculated as follows:  Sale Price minus Expenses of sale minus Adjusted Basis (Purchase price plus cost of improvements)

[cuantoes]

The concession will be added to the purchase price so buyer can cover closing costs as they are short on cash. For example, the home is worth 250K but the mortgage buyer will obtain is 300K (if appraised at that amount). I will get only 250K. Can the 50K concession be added to the Adjusted Basis so I don't have to pay capital gain tax on that amount?

[TomYoung]

You pay income tax on the gain and that gain is calculated as Net proceeds to you minus your Adjusted basis.  

If what you're saying here is that you want to have a "stated" selling price of $300K but will only receive $250K because of a "concession", e.g., an agreement that you'll contribute $50K in order to fix the foundation, then that $50K can be view as an addition to your basis or a reduction of your proceeds.  Either way your profit is the same.

[cuantoes]

I do not want/need to have the full 300K "stated" as a selling price. I simply don't know if I should sell given this concession the potential buyer is requesting since that's the only way they can buy given they are short on cash. I'm fine if in the end I'm netting the asking price of 250K and their mortgage is 300K, but I don't want to pay taxes on an additional 50K I am not receiving. Btw, the numbers are fictitious and I am aware of the long-term real estate capital gain exclusions for singles and couples. The capital gain would exceed those numbers, thus my trying to figure this out. I'm trying to find out if the "stated" price can be only the 250K I'm receiving from seller, or what ways exist for accomplishing that. Thanks!

[DoninGA]

Your Sales price is what is paid by the buyer to purchase your home.  So if your home was on the market for 300K and you actually sold the home for 250K then that was your decision and that is the price that is going to entered on your Purchase and Sale Agreement signed by both you and the buyer.  It is the price that is going to reported on your Closing Disclosure documents prepared by the closing attorney.

[TomYoung]

If the appraisal will support the issuance of a $300K mortgage but you sell the house for $250K then the $250K is your starting point for calculating gain or loss.  The mortgage the buyer obtains is irrelevant.

[cuantoes]

Do you advise I speak with an attorney? The home is on the market for 250K but the buyer wants to borrow 300K with me granting a 50K concession. Before I agree I'd like to be 100% sure I will not have a tax obligation on the 50K concession. Not sure if 250K or 300K needs to be on the contract for buyer to get the 300K mortgage. I was told by my broker that I will not even see the 50K. I would only receive the 250K (minus broker fees, etc.). I wouldn't be receiving 300K and then writing a 50K-check back to the buyer. Again, I just want to be 100% about my tax obligation on the 50K given this scenario. Many thanks to all!

[TomYoung]

Your obligation as a taxpayer is to correctly report your taxable income.  If you do that then you're pretty much bullet-proof with the IRS.

In real estate transactions the word "concession" typically refers to the seller agreeing to pay something on behalf of the buyer, like fixing the foundation as I mentioned, paying the property tax the buyer would otherwise owe, and so forth.  So, mechanically, I'm not sure what form this concession will take in your contract.  Maybe we're really talking about a "gift of equity" here because as you're selling to a relative or old friend.

But it's hard to comprehend how a house with a Fair Market Value asking price of $250K can support a mortgage of $300K.

[Carl]

"Do you advise I speak with an attorney? The home is on the market for 250K but the buyer wants to borrow 300K with me granting a 50K concession."
I think I can see what's going on here. The buyer is probably not being honest with their lender and is trying to get $50K more as a mortgage loan by telling their lender the selling price is $50K more than it really is. Do not agree to this, or you "could" be implicated in the future in what I see as potential loan fraud.

[xmasbaby0]

And when the house is appraised the whole deal might tank.  Speak with an attorney.

[Carl]

Generally, a lender requires as an absolute minimum that the buyer put at least 15% down. (more commonly, 20%). So I get the impression the buyer is telling the lender the purchase price is $300K, since 80% of that is $240K. I think they only have $10K to put down and not the necessary 20% which would be $50K. Or if 15%, they would need to put down $37.5K.
This is loan fraud and the buyer will be implicated in this, if this is "in fact" what is going on here.
More than likely though, this deal would fall apart at the closing, if the lender's appraisal didn't kill it first.

[Opus 17]

If the buyer or seller's attorney are honest, the concession will show up on the HUD-1 and the bank will know about it as well.  Small concessions are not unusual...it may be easier for the buyer to make minor repairs or move in if you have a $100,000 mortgage and a $2000 concession rather than a $98,000 mortgage.  As long as the appraisal and buyer's income support the larger mortgage, there's no problem.  I think some of you are over-thinking the question.  (Too many bored SuperUsers and too few questions this time of year 🙂  

[xmasbaby0]

"Btw the numbers are fictitious..."  So we do not know if the seller is really talking about a few thousand dollars of fix a leaky pipe chump change or that $50K he mentioned.

[Anonymous]

is the potential buyer wanting you to do the concession under the table.  that is, the sales document will show the sales price as $300,000 but no concession. and later you give back the extra $50,000.  I wouldn't do it. you may be getting yourself into legal trouble, but talk to your attorney.      bankers are not dumb.  they will see the closing statement and if the $50k  is on there, they'll realized that the mortgage being sought is above the selling price.   and if the property is really worth $300K why are you selling for $50K less?