tax implication

This is a similar but different situation as that in a previous post by inittowinit. DaveT., if you (or anyone else for that matter) can help me out with this I’d sure appreciate it.

I am buying a house (this will be my primary residence - at least for a while). The owner has agreed to give me 20K back for improvements outside of close (in reality, this money will go partially to improvements, partially towards a dp/closing costs on a rental). Because this is not directly loan money (though my loan is 20K higher because of it), will this be seen as profit by the IRS? All the carlton sheets/etc. courses talk about cash back at close, which is what I’m going for, but I don’t want to end up paying 28% of this “borrowed money” back to Uncle Sam.
Also, I have a friend who has many times gotten money back outside of close (and in other situations) that he treats as cash b/c checks under 5K can be cashed at the bank instead of deposited (i’m told). Since this will be a 20K check, I assume that is out the window.

Thanks a lot.

Typically, a credit from the seller is treated as a reduction in the purchase price. It is not really borrowed funds. You have merely financed a higher percentage of the real purchase price. Be care to check with you CPA so that it is properly reported and not construed to be a form of tax evasion after the close of the transaction (“under the table”).


Thanks for the reply. That was my concern, that this would not be seen as borrowed money. This will be my first year using an accountant, but I will definitely put it in front of him when that time comes. I want to be as protected as possible when it comes to the IRS and I CERTAINLY don’t want any part of tax evasion that can come back and bite me down the road. My fear is that by the time I get to accountant time at the end of the year, the damage (if any) will have already been done.
So, to clarify, will my accountant be able to legally keep me from paying taxes on this money or will I owe on it as income?

Also, I know people take money out inside of closing all the time, and this money is seen as borrowed funds. My banker told me - essentially - “You can’t borrow more than you need for the house, even if it is fix up money.” quickly followed by “I’m not advising you to do this, but people take money back outside of close all the time, which you could do as long as I don’t know about it. But again, I’m not advising you to do this.” Obviously there was some pretty obvious reading between the lines he was giving me there. It is in my best interest to take this money out, b/c I can use it to make a lot more money, but I’m not fond of anything shady. Can you give me any more insight as to how if this is okay as I’ve discussed, or if there is a better way to do it, and as discussed what my accountant will likely be able to do with it at the end of the year.

Thanks a lot!

Your banker is not a tax professional. Take tax advice from tax professionals.

Think of it this way. You have something I want to buy, that you are willing to sell. We agree on a purchase price of $20. I don’t have my wallet with me, so I borrow $20 from my brother, which I give to you. When you give me the item, I notice a small defect that can be repaired for $2. You agree to reduce the sale price by $2 so I can order the repair myself should I decide to do so. You open your wallet and give me $2 back.

You have $18 (our adjusted sale price), I have the item and $2 cash in hand, and, I owe my brother $20 which I repay when we get home and find my wallet on the dresser.

The original contract price was $20, but when the condition of the item was taken into consideration, you agreed to reduce the purchase price by $2 and give me a refund of a portion of the money I had already given you.

This $2 is not taxable income to me, in this situation. This situation is analogous to your real estate deal.

Borrowed money that must be repaid is not income. A seller “rebate, or, refund” of part of your purchase price is not income, it is a reduction in your cost basis as if you had simply paid less for the property to begin with.

So, though you really did borrow more than you needed to purchase the property, it is not taxable income because the loan has to be repaid.


Thank you. I agree with your logic, but I have another question. My banker was not giving me tax advice so much as telling me that the bank would not allow me to borrow fix up money on top of the purchase price, unless I did a 203K loan,which he said would be troublesome to me due to inspections, need for licensed contractors (vs. my normal contractor who does everthing for me), etc. So, if the 20K is outside of close, not inside of close, will the IRS still look at it as borrowed money?

Thanks again, I appreciate your help.

Makes no difference. The seller is rebating a portion of your purchase price. Your basis in the property is adjusted downward by the amount of the rebate.

I don’t understand your problem with a 203k loan? The loan does include rehab money, the loan is reserved for owner occupants, and there is a little more “oversight” for the repairs.

HUD inspectors will inspect the property before work begins, and after it is done; The repair funds will be held in escrow and you can draw against them whenever you complete rehab work and have to pay your contractorrs.

At the end of the project, after you pass the final HUD inspection, any money left in the repair escrow account is given to you.

If your banker does not want to do a 203k, find another lender.