rent-back at home purchase; tax consequences
Jim Oneil
In article <1993May13.1...@oracle.us.oracle.com>, lbo...@us.oracle.com (Lisa Borden) writes:
|>
|> We are about to purchase a home and the sellers have stipulated a rent-back
|> clause in the contract. The amount of time they will rent back is likely
|> to be about 28 days.
|>
|> We were wondering if we must claim their rent to us as rental income, or
|> whether there are any special rules having to do with a rentback during a
|> home purchase, since this is a fairly common occurrence. Also, if we must
|> claim it as income, do we write off the mortgage interest, taxes, etc that
|> we will pay while they are renting as a rental expense, or as a homeowner's
|> deduction?
You do need to claim the income. A spreadsheet is probably best to
check on the rest of the alternatives. Do not use depreciation since it
will be recaptured when you sell the house, while the rest is rolled over
tax deferred for primary residence. I'm not a tax expert but schedule E is
probably needed.
|>
|> We are trying to avoid both losing money and complicating our tax
|> return. Would reducing the rent-back to 15 days or less (where I believe
|> you don't have to report the rental income) be better? That is, in terms
|> of simplicity and/or tax liability.
Interesting. I had other concerns when faced with the same problem. What
if there is a fire? They move. Can you do a walk through and find obscured
faults before escrow? Not with furniture and wall hangings still in place.
|>
|> BTW, the amount of the rent-back will be equal to our principal, interest,
|> taxes and insurance payments for the rental period.
|>
|> any advice is welcomed--
|> Lisa Borden
|> lbo...@oracle.com
John Eaton
:
: We are about to purchase a home and the sellers have stipulated a rent-back
: clause in the contract. The amount of time they will rent back is likely
: to be about 28 days.
Bad move. Delay closing until you can get possesion!!!!! There are lots
of things that can go wrong and all of them bad. Suppose you get a call
two days after closing that the water heater just split a seam and you
need to buy a new one? Suppose they trash the place or refuse to move?
You must do a walkthrough in the empty house before closing and you
better be prepared to walk if you find a significant problem.
If you must do it then have two inches** of money put into escrow to
be released after they have moved out and you have taken possesion.
John Eaton
!hp-vcd!johne
** two inches of money means that when you tell them the amount of money that
will have to be escrowed in order for you to agree to a rent back then their
jaws will drop at least two inches. Make it worth their while to keep you
happy.
Albert Cheng
In article <1993May13.2...@oracle.us.oracle.com>, lbo...@us.oracle.com (Lisa Borden) writes:
>We are trying to avoid both losing money and complicating our tax
>return. Would reducing the rent-back to 15 days or less (where I believe
>you don't have to report the rental income) be better? That is, in terms
>of simplicity and/or tax liability.
I do not have answer to your rent-back question, but if you can reduce
it to 15 days, then can you close the deal 15 days later to avoid all
this trouble? I personally would not allow rent-back after closing.
What if something goes wrong (heaven forbids, but a fire?) during that
period? Whose home insurance covers? What if after they finally move
out and you find a big burn hole on the carpet where the bed was? What
if they want to stay on just a bit longer after the 15 days? Do you
need a court order to evict them? I prefer a clear cut deal, I hand
them the money, they hand me the keys, and we part our ways. Just my
preference.
>BTW, the amount of the rent-back will be equal to our principal, interest,
>taxes and insurance payments for the rental period.
They rent at cost while you may have to rent at the market price? Seems
like you do not get the long end.
Russell S. Laderer
>: rent-back clause in the contract. The amount of time they will
>: rent back is likely to be about 28 days.
>: ----------------------
>Bad move. Delay closing until you can get possesion!!!!! There are lots
>of things that can go wrong and all of them bad. Suppose you get a call
>two days after closing that the water heater just split a seam and you
>need to buy a new one? Suppose they trash the place or refuse to move?
On the other hand, there are a number of very easy methods of resolving
these types of issues.
1) Require that anything staying in the house, (heat pump, water heater,
range, etc) be inspected prior to settlement. Add a clause to the rent
back which makes the seller (soon to be leasee) responsible for replacing
anything which fails during the lease period.
2) Require that the seller obtain prepaid "Renter's" insurance equal to
the cost of the home, and make them provide the policy number, company,
and possibly a copy of the policy to you prior to settlement as a
condition of settlement. This can alleviate worries over disasters.
3) Worrying about them "moving" on the specified date is a bit
paranoid. Face it, they are selling for a reason.
4) Again, a clause requiring the house to be in the same condition
at possesion as closing is easy to insert. Take a video camera
through the house to document the current condition. Chances are,
if the house has been well maintained during the current owners'
residency, they will continue to maintain it for the last month.
To put this in perspective, I just sold my home. I told my real estate
agent not to even consider any offers unless the buyer was willing
to rent back to us until my new home is finished (i.e. no set date to
be out.) My wife operates a home day care business, and would have been
virtually unable to work if we had to find an apartment for 1-3 months.
She also would have risked losing her current customers. I don't know
if the seller's in question have as important a reason, but its
certainly possible.
In case your curious, after listing with this condition, my house
only spent 3 weeks on the market and sold for top dollar. If the
house is nice enough and REALLY what you want, and the buyer set on
the rent back, I wouldn't worry about it. Just protect yourself as
mentioned above.
Scott Laderer
Skip Gundlach
>BTW, the amount of the rent-back will be equal to our principal, interest,
>taxes and insurance payments for the rental period.
>
If I were in your shoes, I would also want to get some rent on the
equity I have tied up in that house, and, if your tax advisor says
that you should do *anything* about the tax implications, at least
enough to cover the cost of compliance i.e. advisor's fees,
preparation fees, and/or nuisance value for having to deal with it...
>any advice is welcomed--
>Lisa Borden
>lbo...@oracle.com
--
Skip Gundlach .nosig (Sorry, that's the best I could do on short
notice, and I'm not even an electrician...)
Timmer
>
>We are about to purchase a home and the sellers have stipulated a rent-back
>clause in the contract. The amount of time they will rent back is likely
>to be about 28 days.
>
>whether there are any special rules having to do with a rentback during a
>home purchase, since this is a fairly common occurrence. Also, if we must
>claim it as income, do we write off the mortgage interest, taxes, etc that
>we will pay while they are renting as a rental expense, or as a homeowner's
>deduction?
>
>return. Would reducing the rent-back to 15 days or less (where I believe
>you don't have to report the rental income) be better? That is, in terms
>of simplicity and/or tax liability.
By the 15 days, you're probably referring to Code Section 280A,
which is aimed at rental of vacation homes, although it probably
still applies here. Second disclaimer: I don't know if these rules
have changed in the tax law changes of the past few years. 280A
says if the home is rented out for less than 15 days of the year, no
rental income need be reported and no rental expenses are
deductible.
But if it's rented for longer, and you have personal use of the
house for more than 14 days in the year or more than 10% of the
number of rental days (which will obviously be the case), you pick
up the income and must allocate expenses between personal and
rental. Further, you only get the rental expense portion to the
extent of rental income.
Say it's rented for 28 days. I think you'd have to take 28/365 of
the interest and taxes and put it on Schedule E, the rest on
Schedule A. Any of that amount in excess of rental income you'd
lose as a deduction (can't show a loss). If your net is still in
the black, you can begin to take some of those other rental-related
expenses, with depreciation coming last, and of course you can only
take 28/365 of these as deductions, up to the amount of income.
If you can keep the rent-back under 15 days, it will definitely be
simpler (there's a lot of hassle over very little money here). And
at least a wash tax liability-wise, since you don't even have to
report the income. But as others have pointed out, there are other
factors to consider besides tax. Myself, I'd just want to avoid
hassling with the whole thing.
--
Tim Kaufman
Controller's Office
Stanford University
John Eaton
:
: 1) Require that anything staying in the house, (heat pump, water heater,
: range, etc) be inspected prior to settlement. Add a clause to the rent
: back which makes the seller (soon to be leasee) responsible for replacing
: anything which fails during the lease period.
Clauses are useless. All they mean is that if you take the seller to court
you will probably win. But going to court is usually a lose-lose situation.
The only way to be sure is to hold enough of the sale money in escrow to
be sure you can recover it without having to see a judge.
:
: 2) Require that the seller obtain prepaid "Renter's" insurance equal to
: the cost of the home, and make them provide the policy number, company,
: and possibly a copy of the policy to you prior to settlement as a
: condition of settlement. This can alleviate worries over disasters.
Renters policies cover everything you don't care about. You still have
to have fire etc.
:
: 3) Worrying about them "moving" on the specified date is a bit
: paranoid. Face it, they are selling for a reason.
:
Reason is they can't make house payments anymore. But what if they can't make
rent payments either.
:
: 4) Again, a clause requiring the house to be in the same condition
: at possesion as closing is easy to insert. Take a video camera
: through the house to document the current condition. Chances are,
: if the house has been well maintained during the current owners'
: residency, they will continue to maintain it for the last month.
Unless of course they have a couple of rowdy teenagers living there.
:
: To put this in perspective, I just sold my home. I told my real estate
: agent not to even consider any offers unless the buyer was willing
: to rent back to us until my new home is finished (i.e. no set date to
: be out.) My wife operates a home day care business, and would have been
: virtually unable to work if we had to find an apartment for 1-3 months.
: She also would have risked losing her current customers. I don't know
: if the seller's in question have as important a reason, but its
: certainly possible.
--------------------------------------------
You were running a home day care and sold your house!!! What would have
happened if one of those little tykes were seriuosly injured? I cannot
believe that closing 3 months early would justify the risk that your
buyer was taking.
John Eaton
!hp-vcd!johne
Lisa Borden
We are about to purchase a home and the sellers have stipulated a rent-back
clause in the contract. The amount of time they will rent back is likely
to be about 28 days.
We were wondering if we must claim their rent to us as rental income, or
whether there are any special rules having to do with a rentback during a
home purchase, since this is a fairly common occurrence. Also, if we must
claim it as income, do we write off the mortgage interest, taxes, etc that
we will pay while they are renting as a rental expense, or as a homeowner's
deduction?
We are trying to avoid both losing money and complicating our tax
return. Would reducing the rent-back to 15 days or less (where I believe
you don't have to report the rental income) be better? That is, in terms
of simplicity and/or tax liability.
BTW, the amount of the rent-back will be equal to our principal, interest,
taxes and insurance payments for the rental period.
any advice is welcomed--
Lisa Borden
lbo...@oracle.com
Lisa Borden
Timmer
>>>taxes and insurance payments for the rental period.
>
>claim the principal, interest, taxes and insurance payments as
>expenses. So the net is 0 and you'd owe no taxes. Just don't take any
>depreciation allowance and all should be sguare.
Principal?!? Regardless of the type of property, the principal
portion of a mortgage payment is not an expense. (Although it is
likely to be a rather slight part of your first monthly payment.)
Ian Mercado
I am SO glad to hear you asking about this ahead of time. We didn't think
about it and got screwed with an additional $2000 of un-taxed income when the
time came to file our income taxes. My advice to you is to either limit them
to the 15 days or add the amount of income taxes you'll have to pay onto
the rental amount.
You have been warned! (Glad to see you're prepared, though.)
Ian
Harvey G Shulman
>>BTW, the amount of the rent-back will be equal to our principal, interest,
>>taxes and insurance payments for the rental period.
>
>I am SO glad to hear you asking about this ahead of time. We didn't think
>about it and got screwed with an additional $2000 of un-taxed income when the
>time came to file our income taxes. My advice to you is to either limit them
>to the 15 days or add the amount of income taxes you'll have to pay onto
>the rental amount.
>
But if you must report the rent as income, you are also entitled to
claim the principal, interest, taxes and insurance payments as
expenses. So the net is 0 and you'd owe no taxes. Just don't take any
depreciation allowance and all should be sguare.
--
Harvey Shulman
Ohio State University, Dept of Psychology
614 292-2759 / h.sh...@osu.edu
Ian Mercado
>>
>>>BTW, the amount of the rent-back will be equal to our principal, interest,
>>>taxes and insurance payments for the rental period.
>>
>>I am SO glad to hear you asking about this ahead of time. We didn't think
>>about it and got screwed with an additional $2000 of un-taxed income when the
>>time came to file our income taxes. My advice to you is to either limit them
>>to the 15 days or add the amount of income taxes you'll have to pay onto
>>the rental amount.
>>
>But if you must report the rent as income, you are also entitled to
>claim the principal, interest, taxes and insurance payments as
>expenses. So the net is 0 and you'd owe no taxes. Just don't take any
>depreciation allowance and all should be sguare.
Yes, but if we had been able to move into the house two months earlier like
we wanted to, we would have had to accept NO rental income and STILL be able
to deduct the interest, etc. We DID still have to pay our rent for our
apartment, ya know!
Ian
Richard Stanton
>But if you must report the rent as income, you are also entitled to
>claim the principal, interest, taxes and insurance payments as
>expenses. So the net is 0 and you'd owe no taxes. Just don't take any
>depreciation allowance and all should be sguare.
What's wrong with taking a depreciation allowance? If you deduct depreciation,
how does that affect your tax position when you sell the house? Do you just
recapture the depreciation (in which case, as long as your tax rate doesn't
change, you've at least had the interest on the money), or does this also mean
that you lose capital gains tax deferral on all or part of your property, even
after you've added back the depreciation you deducted? If the latter, that
could indeed be a pain.
Richard Stanton
Jim Deans
Nothing wrong with taking depreciation. It's just like you figured-an interest free
loan from Uncle. The amount of depreciation taken simply reduces your basis and thus
increases the capital gain at sale . In the past it was possible to take accelerated depreciation on rental houses and that accelerated portion come due in the first year
of sale. Hoever the latest rules are straight-line depreciation which does not have
that feature.
JD Austin/Tx