Sale of House

[calico1597]

We own a winter home in Arizona and recently put our Illinois home up for sale to move full time to AZ.

We've been presented with an acceptable offer but the buyers want to purchase the home at one price and give us about $50K separate for items that were included in the house listing. Their idea is to keep future real estate taxes from taking a big jump, we totally get that idea.

There will be two contracts drawn up separating the two sales, house/property and separate items. Is this a good idea? We don't care as long as it's legal and we get our $$.


We know of someone in AZ who bought their $350K home that way. The seller was a Canadian who was going to have to pay large taxes on a home sale of $300K or higher. He sold the home for $299K and they paid him separate the other $51K. Not the exact situation but similar.

 

[PaunchyPirate]

I would think the house sale would qualify for the homeowners deduction on any capital gains at tax time, assuming you meet the criteria. But you’d probably have to pay taxes on any capital gain on the sale of the other items.

 

[pb4uski]

For you as the seller of your principal residence it may make all or a portion of the $50k taxable where depending on your circumstances it might not otherwise be taxable. If the entire principal residence gain is tax-free then it could cost you as much as $7,500 (15% of $50k).

Are the other things realistically worth $50k?

I'm not sure if the buyer's thinking is sound. To my knowledge what your house sells for doesn't have a direct bearing on its property tax assessment... just indirectly since your sale would be included with all the other comps for similar properties... perhaps it works differently in Illinois.

 

[ivinsfan]

What kind of items are you talking about?

 

[cathy63]

...and give us about $50K separate for items that were included in the house listing...

What are the items? If we're talking about household items like furniture, refrigerator, backyard shed and garden tools, etc, and you're not selling anything for more than you paid for it, then there shouldn't be any tax consequences.

However, $50K is a lot more than these types of items usually go for, so if you could elaborate on what you're selling, you'll probably get better answers.

 

[RetiredAndLovingIt]

Assuming you're selling the other items for less than you paid for them then there no profit no gains

 

[pb4uski]

Agreed, and that is common sense, but would a revenue agent agree? One would hope so.

If not, will the seller have documentation of what they paid for the items sold? That they received $50k for the items will be indisputable.

 

[ocean view]

This smells like property tax fraud to me. If the reason for the split contract is to manipulate the value for property tax assessments, that’s fraud and you want no part of that.

 

[pb4uski]

I'm not sure how you get to property tax fraud. Property taxes are based on fair market value and one sale being screwy isn't going to impact the fair market values used for property tax purposes. Can you elaborate?

 

[ocean view]

I’m sure the rules vary by state, but in CA your property taxes are based on the purchase price of the property. So a transaction as described by the OP would fraudulently lower the tax base by $50k.

The OP stated that the purpose was to prevent future property taxes from taking a big jump. This sounds like price manipulation to me and I assume the local taxing authorities would not take too kindly to it. Otherwise, wouldn’t everyone be doing it?

 

[ivinsfan]

I’m sure the rules vary by state, but in CA your property taxes are based on the purchase price of the property. So a transaction as described by the OP would fraudulently lower the tax base by $50k.

The OP stated that the purpose was to prevent future property taxes from taking a big jump. This sounds like price manipulation to me and I assume the local taxing authorities would not take too kindly to it. Otherwise, wouldn’t everyone be doing it?

OP still hasn't said what the items are

 

[RetireeRobert]

I’m sure the rules vary by state, but in CA your property taxes are based on the purchase price of the property. So a transaction as described by the OP would fraudulently lower the tax base by $50k.

You are assuming an awful lot with your accusation.

OP said some things included with the house sale would be separated out into a separate sales contract at the request of the buyer. That is not illegitimate just on its face.

In fact, it is proper to have one contract for the house, and another contract for other property the seller is willing to leave behind and the buyer is willing to pay for. They just have to fairly value the assets transacted in each contract. Nothing at all fraudulent with that.

 

[ocean view]

Based on the information provided thus far, I stand by MY opinion. YMMV

 

[harley]

Based on the information provided thus far, I stand by MY opinion. YMMV

So if you bought a house and also bunch of furniture from the home seller, you would be fine with paying property taxes on the sofa and lawn furniture and such for years after you've replaced the items? I'm sure your state government loves you.

 

[RetireeRobert]

Based on the information provided thus far, I stand by MY opinion. YMMV

A buyer, who is buying house AND some separate items, and who wants those separate items split out to a second sales contract, is not necessarily trying to commit fraud on the property taxing authority.

That shrewd buyer just KNOWS the price for the house itself is inflated and will lead to increased property taxes later. In fact, a buyer knowing how property taxing works in his vicinity would really be remiss NOT to get the other property split out to a separate contract. So that the sale of the house itself really reflects the price for the house itself--and NOT $50,000 worth of extra (non-real estate) stuff.

 

[RetireeRobert]

So if you bought a house and also bunch of furniture from the home seller, you would be fine with paying property taxes on the sofa and lawn furniture and such for years after you've replaced the items? I'm sure your state government loves you.

+1 He explained it better!

 

[ivinsfan]

So if you bought a house and also bunch of furniture from the home seller, you would be fine with paying property taxes on the sofa and lawn furniture and such for years after you've replaced the items? I'm sure your state government loves you.

Well the OP said 50K which would be a lot of. money for used furniture... what could actually be worth 50k and not be essential to the home

 

[harley]

Well the OP said 50K which would be a lot of. money for used furniture... what could actually be worth 50k and not be essential to the home

Well, that's a good point. Maybe 50 sheets of plywood at todays price?

Actually, rereading the original post, it does sound like the intent is to lower the price for tax reasons, and sounds like the items were originally part of the sale. In which case I would have to agree that it's at least questionable. It would end up depending on precisely what the items are, and I doubt we're going to get an answer to that question. If the items are truly not part of the home (furniture, appliances, other limited lifetime items), then I'd say it's legit. If they're talking about an in ground pool, geothermal HVAC system, things like that that you can't take with you anyway, I'd say it's tax fraud. But as I said, I doubt we'll get that question answered.

 

[RetireeRobert]

Well the OP said 50K which would be a lot of. money for used furniture... what could actually be worth 50k and not be essential to the home

Maybe home has a shop---filled with a lot of shop equipment. Or maybe it is a farmette, with some farm equipment laying around.

Maybe there is an expensive pool table, and loads of real leather furniture, and a couple pieces of expensive artwork (by a now deceased artist) in the seller's decor.

I would be loathe to accuse the buyer (or seller) of attempted fraud on the property taxing authority. Because there are so many reasonable explanations for the buyer's request. And in fact, assuming there "is" other property worth the $50,000 being split into a separate sales contract, the buyer "would be a schmuck" to "not" want it separated into a second sales contract. That buyer may be a lot like many of us here at early-retirement forum---he watches his pennies.

 

[RobbieB]

It wouldn't be that hard to get fifty grand worth with;

Home Theater system, High end appliances, designer furniture.

We have a restoration hardware couch (8 grand) with a gas fire table (15 hundred) in front of it and a thousand dollar cast concrete fountain on the side. All patio furniture that people might not want to move and the buyer might want because it fits nice.

But yeah, for fifty grand it better be documented well.

 

[Sunset]

I see the opportunity for OP to get the $50K check first, cash it and then sell the house to someone else after handing over the curtains, couch, dining set and BBQ... etc.

 

[RetireeRobert]

I see the opportunity for OP to get the $50K check first, cash it and then sell the house to someone else after handing over the curtains, couch, dining set and BBQ... etc.

Speaking of fraud!!

 

[Winemaker]

I have purchased property and other items in the property separately before; there was nothing shady going on. Some caveats, though. My purchases were for rental property, and the purchase agreement spelled out what I paid for the land, building and appliances separately for depreciation purposes. Also, the mortgage company will only loan you money for the land and building not for personal property.

 

[HarveyS]

We've been presented with an acceptable offer but the buyers want to purchase the home at one price and give us about $50K separate for items that were included in the house listing. Their idea is to keep future real estate taxes from taking a big jump, we totally get that idea.


We know of someone in AZ who bought their $350K home that way. The seller was a Canadian who was going to have to pay large taxes on a home sale of $300K or higher. He sold the home for $299K and they paid him separate the other $51K. Not the exact situation but similar.

Having contested my RE tax in IL many times, sales price of my property did not matter. Tax in my town was based on an assigned value which was based on 3 year rolling average of prices of similar properties. This way a foreclosure sale didn't get taxed at the foreclosure sales price. To further complicate things, tax was based on an assessed value that was not even close to the fair market value. In 2019 my assessed value was 33% of the fair cash value. Tax was based on assessed value, but the tax rate was high enough that my property tax was still 2.7% of the fair cash value. So, for the proposed idea, it would not work in my town. IANAL and I don't see an issue on the seller side - except for possible tax consequences as pointed out earlier. I wonder what your Realtor thinks of this idea? They should have an opinion. So should your RE attorney. Nice to get ideas from SGOTI, but I'd defer to the professionals in your town/area.

Your AZ story sure sounds like fraud to me, but again IANAL.

 

[pb4uski]

I’m sure the rules vary by state, but in CA your property taxes are based on the purchase price of the property. So a transaction as described by the OP would fraudulently lower the tax base by $50k.

The OP stated that the purpose was to prevent future property taxes from taking a big jump. This sounds like price manipulation to me and I assume the local taxing authorities would not take too kindly to it. Otherwise, wouldn’t everyone be doing it?

The main problem with your reasoning is that, as stated in the OP, the property in question is in Illinois and not in California. If the subject property were in California then you might have a legitimate point... but it's not, so you don't. A simple Google search would have told you that assessed values in Illinois are based on a percentage of fair market value, so what the OP's buyer pays for the OPs property isn't going to impact the buyer's property taxes.

That is why I suggested that the buyers thinking was not sound in post #3.

Perhaps the buyers are corrupt Californians moving to Illinois who think that if they play this game that their future property taxes will be lower with this scheme to split the purchase price.