Need Tax Advise - cash back on home purchase

Ok …here is the deal. (Hypothetical situation)

I am purchasing a home …which is listed for $950,000.

The seller has agreed to do the following.
He is willing to accept an offer of $900,000 for the home.

I will make an offer for $950,000. The seller will credit back to me upon close of escrow $50,000.
(He will basically write me a check for $50,000)

The seller did not want to do this because he said he would have to pay capital gains tax on the extra $50,000.

How can we structure the deal so he does not have to pay taxes on the $50,000.

Once recommendation was to have a letter signed by both parties that the $50,000 refund from the seller to the home buyer is a “Credit Adjustment” for home repairs which the seller did not want to perform.
However, our tax guy says this may not pass the “stink test” by the IRS.

Any ideas on how the seller can avoid paying taxed on the extra $50,000???

Thanks All

the reason it will not pass “the stink” test is that credit appears to be solely for the purpose of avoiding taxes. Transaction constructed solely for the avoidance of taxed is illegal.

To make this credit legit (IMHO), you would would need contarctors estimates and documentation that the property had “substandard conditions” that required 50K in work. “Substandard” would not mean the kitchen cabinets are dated or you don’t like the color of the bathroom tile, but rather it had massive mold problems that required abatement to make it habitable.

Perhasp you could propose an installment sale, using seller carry back to spread his taxes across several years.

But the seller is really not trying to avoid taxes.
Since the extra $50,000 is being returned to the buyer.

(You mean to say the seller must pay taxes on the $50,000, and the buyer since it is cash back, will have to pay taxes on the $50,000)

Any advise would be helpful.

The thing is that as a realtor I want to keep my hands out of this deal as much as possible. I told both the seller and buyer, that I am not part of this deal.
Any dealing regarding this issue is between them and that they should have an attorney write the documents for the cash back.

here’s some thoughts from a different angle.

The IRS can only see numbers on the tax form. The fact that seller was willing to take 900k or any other details of the transaction (the house was trashed, the seller was in a hurry,etc) are not captured in that document. So, they see $950k sale price and then all the adjustments to calculated the cost basis (i.e. how much the seller purchased it for, selling cost, etc). This 50k “credit adjustment” is going to stick out like a sore thumb and the vague nature of the description makes it suspect. Also, the IRS at the time of review of the tax form has no way to know if it was actually paid.

So, this kind of thing will almost certainly get a request for additional documentation and review of the transaction. So in the end, it is not a question of whether its right or wrong, but the burden of proof will be on the taxpayer to prove itis a legit expense related to the transaction in the face of IRS review. IMHO, one should avoid creating situations that are an invitation to the IRS to probe your financial body cavities. :o