FTHB purchase price

[Jesse]

Taxpayer purchased a foreclosed home in need of repairs. The lending institution kept funds in a "repair hold escrow" account with the terms the repairs need to be done within a stated amount of time or they would hire the repairs to be done and pay out of these escrow funds.

The contract sales price was $42,000 and the repair escrow is $29,000. She has a detailed list of what needs to be completed and estimates for all completion.

What is my basis for the First Time Home Buyers Credit?

$42,000?
$42,000 plus $29,000?
$42,000 plus actual cost paid out of the repair escrow funds at time of actual occupancy?
None of the above?

[solomon]

Interesting. §36 is clear that the purchase date prevails unless the house is self constructed.

Assuming the purchaser completes all the repairs, what happens to the funds in escrow. I gather the bank pays as purchaser submits the invoices? If so, and the repairs are less than 29K, does the balance go to the purchaser?

Does the closing document show anything about the 29K?

[Jesse]

Indeed, I found that interesting as well. Before researching, date of occupancy came to mind, but as you pointed out, if purchasing the settlement date is what counts. That is why I'm stuck in the middle.

Actually the way the loan is set up the $29,000 is part of this loan, so any amount that is not spent on repairs will reduce the principal. I have never come across this creative financing, but the way I see it, she is paying interest on money that hasn't been spent yet(the bank also charged $450 "escrow administration fee"), but the escrow is being held and will be disbursed by a Title Company, not the bank itself.

Edit:
Closing statement:
Contract Sales Price: $42,000
Settlement Charges to Borrower: $33,500(Includes the $29,000 plus other settlement charges)

On Settlement Statement:
Repair Hold Escrow: $29,000

[solomon]

Edit:
Closing statement:
Contract Sales Price: $42,000
Settlement Charges to Borrower: $33,500(Includes the $29,000 plus other settlement charges)

In view of this, my inclination is to use 71K.

[Jesse]

This is a child of a very good friend and I offered to do this as a favor, not that this makes a difference in the correct way to complete,but anyways, my suggestion is not to be hasty and wait to see what the actual repair costs are.

If she wants to process an amendment immediately I'd use the $42,000. If we wait I'm leaning towards adding the cost of repairs up to $29,000 to the purchase price. While waiting I was hoping to find something more concrete to tell her sorry, I was wrong and still go with the $42,000 or to go ahead and add the repair costs to the $42,000.

[AJsTax]

Basis

From form 5405
"Purchase price. The purchase price is the adjusted
basis of your home on the date you purchased it. This
includes certain settlement or closing costs (such as legal
fees and recording fees) and your down payment and
debt (such as a first or second mortgage or notes you
gave the seller in payment for the home). If you build, or
contract to build, a new home, your purchase price can
include costs of construction. For more information about
adjusted basis, see Pub. 551, Basis of Assets."

From that I would take it to mean that the basis would include the money to do the improvements, less any of the settlement or closing costs for taxes, etc.
What would the basis be if you were to make it a rental that day? Should be the same for the credit.

[Jesse]

Interesting, it would not be available to rent until some of these improvements were completed as it would not pass Wisconsin required inspection, repairs would be added to basis when made available for rent.

Right now I am going to wait for repairs to be completed and see what the actual costs are. If they are actually less then the escrowed amount that is the number I am going to use, if more than the $29,000 I intend to cap at that amount.

Thanks for opinions offered, I'll bump this to the top one more time for any other thoughts. Agree? Disagree?

[Burke]

[QUOTE=Jesse;85939Right now I am going to wait for repairs to be completed and see what the actual costs are. If they are actually less then the escrowed amount that is the number I am going to use, if more than the $29,000 I intend to cap at that amount.
Thanks for opinions offered, I'll bump this to the top one more time for any other thoughts. Agree? Disagree?[/QUOTE]


Since the purchase price rules specifically state "down payment and debt as well as closing costs," I would base it on the contract sales price and the repairs, assuming the mortage was for the total of these two amts. Like the previous poster asked, what happens if they are less than $29K? Does the bank apply any of this excess amt to the mtge principal? What if they are more? Does that come out of the TP's pocket?

[Jesse]

Like the previous poster asked, what happens if they are less than $29K? Does the bank apply any of this excess amt to the mtge principal? What if they are more? Does that come out of the TP's pocket?

Yes the bank applies the excess amt to the mortgage principal. If it is more it comes out of the TP's pocket.

That is why I think we should wait for actual repair costs. If the repairs are less, the house did not really cost $71,000($42,000 + $29,000). If the repairs are more, it was not in the original purchase so she can't take credit for more than what the house "cost" at original purchase.

[Burke]

I agree with that assessment.