Rental Proceeds or Sales?

[Snaggletooth]

Taxpayer is attempting to sell a principal residence. A buyer makes an attractive offer, pricewise, but says he'll have to pay the seller 3 months "rent" until he is able to get his own financing. Sales price is $175,000, and the buyer agrees to pay $1000 per month rent until his financing comes through.

If transaction plods on for 3 months and the buyer successfully gets his financing, I've been telling the seller to add the $3000 on to the price of the house, for the 3 months' rent.

However, many times the buyer cannot get financing, and he ends up staying several months in the house, and pays what amounts to "rent." At some point the buyer just can't raise the money, and after awhile the buyer asks him to leave.

My question: At what point in this process does the buyer's money cease to be "sales" and begin to be "rent?" This scenario happens frequently in today's real estate environment.

Thanks in advance, Ron Jordan

[Gene V]

Rent

Snaggletooth, I would say the rent is just that, rent, and cannot be added to the buyer basis. According to Pub. 523. Some settlement fees and closing costs you cannot include in your basis are:
1. Fire insurance premiums,
2. Rent for occupancy of the house before closing

[John of PA]

Stay away from Rent

My initial thought here is to stay away from calling it rent. For the seller may be starting the process of converting the property to a rental property (If it's not already). If the 3 months turned into 2 years, it could be a serious problem. I would just add $1000. per month to the sales price to be collected at settlement (or sooner but treated as a non-refundable deposit).

[Chief]

Chief

Ron:

I agree with Gene in this matter of renting a house that isfor sale. That income is rent. Further I would never do that. First of all, real estate professionals will tell you that this is a risky step. When you take your property off the market, you may miss a qualified buyer who has no difficulty in getting financing. While the prospective buyer is living in the house and gets buyer blues he can then back out. No telling what kind of condition he would leave the house in. If that is done, then a substantial payment should be made so the buyer would not back out. Aparently the buyer is not ina position to do that.

Looking forward to seeing you tomorrow night. We have reservations at the Ramada. Will be calling you when we have some idea of arrival.

[Snaggletooth]

The REAL Danger

With all gratitude to those who have posted, the real problem is not the basis of the home, or claiming of rent per se. The danger of a transaction as presented is quite real, and quite relevant, but strays from the question at hand.

What I fear is that this perfectly normal residence, with a $60K profit exempted because it is a principle residence, becomes RECLASSIFIED by an auditor into a rental unit, simply because the owner rented out for a few months in an attempt to accommodate the buyer.

This has a second part to the question also: If reclassified into a rental unit, does the depreciable basis of the home equal the seller's cost, or the FMV?

[Gene V]

Rental property

This has a second part to the question also: If reclassified into a rental unit, does the depreciable basis of the home equal the seller's cost, or the FMV?

Depreciation base is the lower of original cost plus improvements or FMV.

As long as the owner live in and owe the house two out of the last 5 years,then he could have rented the house for three years and still qualified for the Sec.121 exclusion.

Also Temporary absence. Short temporary absences for vacations or other seasonal absences, even if you rent out the property during the absences, are counted as periods of use. Pub. 17 page 113

[Bird Legs]

Rental or Residential

Ron, in the back of my mind, vaguely remember that temporary rental does not affect it being residential property. No depreciation would be taken because it was placed in service and disposed of within same year.
You might check out these IRS Pubs. 523, 527, 530, 537 and 544.
tweet...

[S T]

Observation

Taxpayer is attempting to sell a principal residence. A buyer makes an attractive offer, pricewise, but says he'll have to pay the seller 3 months "rent" until he is able to get his own financing. Sales price is $175,000, and the buyer agrees to pay $1000 per month rent until his financing comes through.

I not sure Snaggle, something doesn't sit right with this. I'm with Chief on this one. I would be concerned about the potential buyer tying up the property and having the "for sale" property not on the market. I would further be concerned, if the buyer can not come up with the financing 3 months later, then the seller has a renter, maybe! What legal binding agreements are in place?

Sometimes you will see a seller rent back after the close of escrow, not normally a buyer rent before the close of escrow. (Would that be considered like a lease option?)

If your taxpayer has not already done so, I think I would advise the taxpayer to talk to a real estate attorney or real estate broker to make sure all of the "I's" are dotted, and all of the "
'T's" are crossed.

Sandy

[John of PA]

S//B Under agreement

If the property is rented temporarrily, it still should be under a contingent agreement of sale so as to not shift all the risk to the seller and no risk to the buyer.

[taxfun]

early occupancy/rental

According to my contacts in the real estate field, this is one of, if not the most, litigated
areas in the field. Never, never allow someone to occupy a property prior to closing.