Got an offer for my 1st rehab. After some negotiating the buyers came back with a new plan, Ameridream. The gist is that the purchase price gets inflated, I (seller) pay a 3% kickback to buyer to cover down-payment & closing costs, and in the end I get pretty near what I want for a sale price.
My question is, how does the inflated price affect my profit for capital gains? I know all costs (rehab, mortgage, etc…) get written off. I assume that the 3% I kickback can get written off as well but I want to know for sure before accepting the offer. We’ve left a message for our accountant but since it’s late we don’t think we’ll get an answer until tomorrow.
Anybody out there have any knowledge on the subject?
I appreciate your feedback,
The closing price is what you pay capital gains against…so, the answer is “YES”, you do pay capital gains for the higher price. I just did a similar one…an older widow lady that has worked all of her life scraped enough together to buy the house with a state-money program. She loved the place. We had it listed at $72.5K, she offered $75K and $3.5K in closing, so only $1K less than our list. I have to pay capital gains on the $75K, though.
Doesn’t it matter how long the house was owned? If the rehab and sale is happening in a short time, aren’t we talking income tax instead of capital gains? I guess the answer is the same, though. Why do I feel like I get taxed everytime I turn around? ;D
Technically, it’s a “short-term capital gain” and is taxed at the ordinary income rate.
The difference in my case is negligible…
Thanks for the replies. However, upon a lot more investigation, I’ve found out more about the Ameridream program. It’s a non-profit organization that helps buyers with down-payments and closing costs. They give the buyer a monetary gift. The 3% that I kick-back doesn’t go to the buyer, but rather to Ameridream to replenish their funds. I then can write off the donation on my taxes. I, of coarse, am still waiting to hear back from my accountant for official confirmation of the technicalities.