I paid an “assignment fee” to a guy who found a house for me that I bought. He “assigned” the house to me (for a $25,000 fee) and then I purchased it through a regular sales contract from the seller. The IRS is saying that that fee should be added to the basis of the house. I am trying to argue that that is a professional fee, just like any other (expensed). I was paying him for his expertise in identifying a house and knowing the market. The auditor is fairly flexible. Is there a code section that would support my claim? If she can see that she will consider my point. She feels it is to go to the basis because it was paid in connection to acquiring the property.
By the way, the person who received the $25000 - isn’t that considered ordinary income for him?
Why is the auditor saying that it should be added to basis and therefore capitalized?
Let’s clarify what happened as a result of the assignment. An investor had a contract interest in a property. You agreed to pay a certain price for the property and the investor “sold” you his contract with the property seller. The price you agreed to pay the investor for the property was allocated between his cost basis and his profit. The investor simply took his profit in advance as an assignment fee.
A condition of your purchase agreement with the investor is that you have the right to replace the investor in his contract with the seller and complete the purchase at the price and on the terms the investor had negotiated with the seller.
If you want to use the argument that the fee was just a professional service fee similar to a commission that you would pay a real estate agent, then the IRS agent will also tell you that a real estate agent’s commission is added to the cost basis and not expensed.
I strongly suspect the IRS will prevail in the audit.
It will cost you more to fight than you will gain. It is very important to have a tax expert review the transaction before you execute it so that you have the most tax efficient structure.