Sale of House

What does the realtor think ? Will they still get their 6% of the $50k ? I wonder what their mortgage company thinks ? I see nothing wrong with separating out the personal property from the house sale as long as it is reasonable. It's not like they're trying to evade sales tax or income tax. I'm confident the property tax assessors know what the taxable value of the house is no matter what your purchase agreement is (they'll tell you) and will tax it accordingly. If they're paying the $50k with a personal check..I'd recommend a cashiers check instead. As long as you have a cost base of at least $50k in these items it shouldn't create a taxable event to you, its just like having a nice little private garage sale.
 
We've lived in the Illinois home for 21 years, it's been paid for since 2009. The market is good now and we're getting more than we could have a year ago. We're getting $397K total, buyer wants the contract sale for $350K and will give us $47K extra on the side. That supposedly covers all new household appliances (kitchen & laundry), John Deer mower with snow blade, a car lift in the outbuilding and few other smaller items. No, the value of everything does not come near $47K. Maybe half if we stretch their value.

In the original listing, all these items were included at $429K. We knew that was a high price for this area, but the realtor wanted to give it a try. Current taxes are $6,400 annual for 2.10 acres, brick ranch home built in the 80s and an outbuilding 40x60 20 years old.

We're in a rural area, everyone one here has a couple acres. We have 3 homes across the street from us that are total dumps and lost a couple sales because of that.
 
calico1597 said:
We've lived in the Illinois home for 21 years, it's been paid for since 2009. The market is good now and we're getting more than we could have a year ago. We're getting $397K total, buyer wants the contract sale for $350K and will give us $47K extra on the side. That supposedly covers all new household appliances (kitchen & laundry), John Deer mower with snow blade, a car lift in the outbuilding and few other smaller items. No, the value of everything does not come near $47K. Maybe half if we stretch their value.

In the original listing, all these items were included at $429K. We knew that was a high price for this area, but the realtor wanted to give it a try. Current taxes are $6,400 annual for 2.10 acres, brick ranch home built in the 80s and an outbuilding 40x60 20 years old.

We're in a rural area, everyone one here has a couple acres. We have 3 homes across the street from us that are total dumps and lost a couple sales because of that.
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Couldn't you just counter with 25K on those items. I'm wondering if this buyer is having other issues and the tax stuff is a red herring.
 
calico, if you tallied up your cost of the various items, how much do you think that would total? SK raised an interesting point, will the agent get their commission on the side sale.

I'd talk with your agent and try to understand what the buyer's motivations are and whether they have an validity.... and also what the agent thinks you should do. I would think it would be to the buyer's disadvantage to carve out the items since given what they proposed they could only apply for a mortgage based on $350k vs $397k... unless perhaps they think the house won't appriase for $397k and that will gum up the mortgage process.

I would not do what they proposed because you would likely have a capital gain for the excess of the $47k over your cost for the items (in theory anyway) whereas any amount in the real estate purchase price will be tax-free since it is your principal residence.

You might see what you have for documentation of your cost for the items and agree to use that number rather than the $47k... that way you would have no gain or loss on the side sale and any gain on the house sale would be tax-free since it is your principal residence. You can also use that rationale to explain your counterproposal to the buyer.

Alternatively, I guess you could agree to the $47k if the buyer were willing to increase the $397k to cover any capital gains tax that you would incur on the side items. So for example, if your cost of the side items is $20k then you would have a $27k gain that would presumably be taxed at 15% which is $4k.. so to make you whole they would need to increase the total to $401k with $354 for the house and $47k for the other stuff.
 
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If the realtor is ok, I'd be ok, but I'm not sure I'd be totally comfortable just because I've never heard of this. As long as the "on the side" is a cashier's check and has all the protections as the home payment... it's stuff like this where a realtor earns their commission.

Or just say no. In this market you should have no trouble finding another buyer at your full price.
 
ivinsfan said:
... I'm wondering if this buyer is having other issues and the tax stuff is a red herring.
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+1 like perhaps a relative is providing mortgage funding but will only lend on up to $350k in value or something like that.
 
So this is interesting,since the buyer has been in the house 21 years the appliances in there now would be replacement appliances, and the mower isn't part of the real property?


Why would they owe taxes on this? In this hot used car market, if you sell a car for more then you paid for it, do you owe taxes on that?



I think the most important question is why is the buyer asking for this? Are the buyers finances solid? ....
 
ivinsfan said:
So this is interesting,since the buyer has been in the house 21 years the appliances in there now would be replacement appliances, and the mower isn't part of the real property?


Why would they owe taxes on this? In this hot used car market, if you sell a car for more then you paid for it, do you owe taxes on that?



I think the most important question is why is the buyer asking for this? Are the buyers finances solid? ....
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From what the OP wrote, the appliances are new (see below). Real property is usually land and buildings only so the mower would always be excluded.

Custom varies around the country as to what appliances are included. In most areas of the country all appliances other than laundry would typically be expected to be included in the house sale so that would include refridgerator, stove/cooktop/oven, dishwasher, microhood, etc but exclude clothes washer/dryer and an extra freezer. In some areas of the country the refrigerator is not include but stove/cooktop/oven, dishwasher and microhood are. In my experience laundry appliances and an extra freezer are usually not part of the property but are frequently included in the sale if the seller doesn't want to move them.

Our old house had a LCD projection TV mounted on a built-in platform. I wanted a nwer tv and didn't want to move it so we just included it in the sale of the house.

And on the last part, yes, if you sell a car for more than you pay for it you would have a capital gain that could be taxable.

calico1597 said:
...That supposedly covers all new household appliances (kitchen & laundry), John Deer mower with snow blade, a car lift in the outbuilding and few other smaller items. No, the value of everything does not come near $47K. Maybe half if we stretch their value ...
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There doesn't seem to be any problems with the buyer's finances. They are putting 40% down on their loan to finance the house at a sale price of $350K. And they are providing proof they have the $47K to pay us. They are only trying to keep the real estate taxes from taking a future hit. My realtor checked with other realtors in the area and this is done sometimes.
 
It may be done sometimes but does it really work? When the county assesses the property they will pay no attention to what the buyer bought the house for... the appraised value will be based on comparables (which will not include their purchase).

And if the assessed value is higher than $350k and the buyer's grieve the assessed value then the assessors will tell them... congratulations on swinging a good deal... good for you! ... but it won't change the outcome. That's my experience from three grievances in two different jurisdictions.

I guess if I were you I would tally up my cost for the side-items and offer to sell them the side-items for that amount and the house for $397k less the cost of the side items like I suggested a few posts ago and the reason that you can give them is that you don't want to risk having to pay capital gains tax on the side-items.
 
ivinsfan said:
... Why would they owe taxes on this? In this hot used car market, if you sell a car for more then you paid for it, do you owe taxes on that? ...
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Yes, you'd owe capital gains tax on the car in that situation.
 
pb4uski said:
It may be done sometimes but does it really work? When the county assesses the property they will pay no attention to what the buyer bought the house for... the appraised value will be based on comparables (which will not include their purchase).

And if the assessed value is higher than $350k and the buyer's grieve the assessed value then the assessors will tell them... congratulations on swinging a good deal... good for you! ... but it won't change the outcome. That's my experience from three grievances in two different jurisdictions.

I guess if I were you I would tally up my cost for the side-items and offer to sell them the side-items for that amount and the house for $397k less the cost of the side items like I suggested a few posts ago and the reason that you can give them is that you don't want to risk having to pay capital gains tax on the side-items.
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+1 just tell them you ran it past your accountant and that's what he advised you to do. you don't have to tell them your accountant is Mr Pb4
 
OK, so if we assume it's legally acceptable to do this (assuming you can trust the real estate agent), go ahead and do it. It's up to you whether you wish to comply with capital gains rules with the IRS.

If you sell something at a profit, the capital gains are supposed to be reported to the IRS and appropriate taxes paid on them. Lots of people don't do that if there's no paper trail and/or the amounts are small. But that doesn't make it legal. If you're selling $15k of stuff for $47k, the IRS probably considers that enough capital gain to expect you to pay appropriate taxes on.

I just sold a mobile home for $35,000 and reported $8,000 in long term capital gains on my tax return. The process didn't involved any paperwork that would be sent to the IRS. A mobile home with no land attached in Florida is sold just like a vehicle.
 
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calico1597 said:
We've lived in the Illinois home for 21 years, it's been paid for since 2009. The market is good now and we're getting more than we could have a year ago. We're getting $397K total, buyer wants the contract sale for $350K and will give us $47K extra on the side. That supposedly covers all new household appliances (kitchen & laundry), John Deer mower with snow blade, a car lift in the outbuilding and few other smaller items. No, the value of everything does not come near $47K. Maybe half if we stretch their value.

In the original listing, all these items were included at $429K. We knew that was a high price for this area, but the realtor wanted to give it a try. Current taxes are $6,400 annual for 2.10 acres, brick ranch home built in the 80s and an outbuilding 40x60 20 years old.

We're in a rural area, everyone one here has a couple acres. We have 3 homes across the street from us that are total dumps and lost a couple sales because of that.
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pb4uski said:
... I guess if I were you I would tally up my cost for the side-items and offer to sell them the side-items for that amount and the house for $397k less the cost of the side items like I suggested a few posts ago and the reason that you can give them is that you don't want to risk having to pay capital gains tax on the side-items.
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I agree with pb4uski. Don't sell the side items for more than their value, or at least not for more than you paid for them.

I think you should also read IRS Pub 523 Selling Your Home, and understand what's supposed to be included in the basis for tax purposes. It might be that none of these side items are things the IRS would consider to be permanent improvements, and you're selling for less than the exclusion amount of $500K anyway; but I think I'd avoid structuring a deal in a way that might raise eyebrows if the IRS ever looked at it.
 
I'd say that if you are selling them household items (furniture, appliances, etc) also then having two contracts is a smart idea.
 
If the other items are furniture, you will have to prove a cost basis for them - which you probably don't have. If the furniture (or electronics/whatever) is over 5 years old, the theoretical life of those items may have a basis of zero at this point. Either way it is a headache, and you will have to pay tax.



'ocean view' is correct. With the stated admission that this is to reduce the sale price of the home to lessen property taxes this could indeed be considered tax fraud by a revenue agent. One agent might say it is, the next might say it isn't. Is that a battle worth taking so the buyer can get a small discount on their yearly prop taxes?


There is a way to do this type of deal that will satisfy both parties but I'm not about to get into that on the message board.
 
Illinois periodically appraises real estate based upon sales prices of similar properties. It is NOT an acquisition cost state like California where the sales price of the actual house determines value. So it is very unlikely that the buyer’s scheme will fool anyone. As a commercial and residential appraiser for 20 years in a similar state (Montana) I was able to uncover such attempts with ease. Part of my job was to “verify” sales before using them as a comparable. Buyers and sellers are sent forms to fill out which ask a lot of nosy questions. Then I would follow up in person or on the phone: What was the sales price? What costs were involved? Any financing? And special financing? Did the seller pay any buyers costs? Was it a market sale? Arms length transaction? Was any personal property included? Etc. If the sale is extremely low (or high) it is considered an “outlier” and discarded from the comps even if I couldn’t figure out exactly what was going on. Statistical regression analysis is used to determine outliers and they stick out. If people were ever successful in fooling the systems they weren't cheating the state or the county they lived in out of property taxes. They were cheating their fellow residents by not paying their fair share and dumping that burden on to the rest of us. The county and the state just divide their budget into the taxable value of their real estate to determine how many mills are needed to make budget in each taxing jurisdiction. They aren’t allowed to come up short because Joe Blow decided to scam the system.

There are many reasons why someone might want to do this legitimately. One of those reasons might be not wanting to finance their personal property part (appliances, furniture, etc.) for 30 years. In my rural area of Montana it is not unheard of for expensive vehicles with snowplows to be included, and lenders don’t want to finance a Jeep with a plow, 4 cords of wood, etc. for 30 years either. But in the absence of a better reason than given by these buyers I would be suspicious.

It gets stickier when financing is involved. There are many ways to get sideways with federal laws when loans are involved. I would tread carefully and get some good tax advice before considering such an offer. In theory, making money on personal property might be a taxable event.
 
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I can understand the buyer’s concern, because Illinois real estate taxes are pretty high. You could easily pay 10K or more. The separate 50K should not be subject to taxes for the sellers .. these are used items and furnitures that have depreciated in value .
 
I’m wondering why have a separate contract with written documentation? Are you offering a warranty on the items? We have purchased and sold things like furniture and appliances outside of real estate transactions before. In fact that is how we’ve typically seen this handled since the items aren’t real property. We always just handled these purchases or sales as cash transactions with no paperwork and it never occurred to us to report any income or losses on these items.

I would imagine that the vast majority of people who have garage/yard sales to dispose of items they don’t want to move don’t consider them taxable events. Perhaps because normally one is selling items for far less than the cost basis.
 
Sales Tax?

Not sure about the law in Illinois, but you might be required to collect sales tax on the amount of the separate transaction since it would be not considered part of a real estate sale (which is generally exempt from the usual sales tax).
 
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