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levr
levr, Tax Advisor
Category: Capital Gains and Losses
Satisfied Customers: 29941
Experience:  Working for a large tax preparation service
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I'm selling a real property to a friend that includes the

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Hello. I'm selling a real property to a friend that includes the value of a car loan that I paid off for the individual. How do I add this to my cost basis?
JA: The Accountant will know how to help. Please tell me more, so we can help you best.
Customer: What else do you need?
JA: Is there anything else the Accountant should be aware of?
Customer: No.

Your cost basis is what you PAID for that real property.

Your cost basis is not changed because you paid the car loan for the buyer.

Instead - the sale price will include the amount you paid directly to the buyer plus all payments you make for that buyer - including the amount you paid the car loan.
Just an illustration example.
Assuming time ago you purchase that real property for $50,000 - that would be your cost basis.
Today - you are selling the property for $80,000 - that is your selling price.

From that amount - you pay off the car loan for the buyer $15,000 and pay directly to the buyer $65,000.

Let me know if you need any help with reporting.

Customer: replied 1 month ago.
in your example I would be on the hook for capital gains tax on the difference between the $80,000 and the $50,000? Thanks.

Yes - that is correct for that example.

But whether you will have any tax liability on that gain depends on other circumstances - your total income, filing status, other deductions and/or credits.

The buyer will establish his/her basis in that property $80,000 which woudl be the purchase price.

Whatever you pay on behalf of the buyer as part of that sale transaction will be included into the sale price.

Customer: replied 1 month ago.
I'm in the 28% bracket and also have state income tax on top of that. I paid off a $6,300 loan for this individual. It sounds like I'll have to recall the loan. Otherwise I'll be on the hook for several thousand dollars in taxes if I include the loan amount in the sales price of the home. Is there any other way I can reduce my gain in this situation?

If you held the property at least one year - that will be long term capital gain - taxes at reduced rate - but in your income level - there will be additional AMT taxes...
​In your situation you are selling the real property.
I might confuse a little...
So the buyer pays you - and you will be a recipient of the money.

Why do you include that car loan here?
Just have a separate sale price - and let the buyer to handle his/her car loan?
That might be a simple solution... is that possible?

Customer: replied 1 month ago.
She wanted to fold the car loan into her house note so that it would be spread over 30 years.

So she pays YOU for the real property and at the same time wants you to RETURN some of that payment in the form of loan payment for her behalf...
You will need to mark that amount as a reduction of your sale price - and in this way - it will be excluded from your gain.

Is that transaction regarding loan repayment is reflected somehow in your sale contract?

Customer: replied 1 month ago.
We have not executed a sales agreement yet. But I'm guessing a lender will not want to see that additional loan item in the agreement since it's not for the purchase of the property. They would reject it immediately.

I would agree with you that lender will not accept such contract when the mortgage is based on the value of the property...

So you will have a sale price states in the contract - and in HUD1 I assume - that will likely be required by the lender.

Then the title company will issue 1099 form reporting THAT sale price to you and to the IRS.
So you would need to adjust the sale price - based on that amount you actually pay back.
You may have an additional addendum to you sale contract regarding reduction of the sale price and payment documents where that reduced amount will go.

You will be able to adjust the sale price on your tax return when the sale will be reported.

But that would be not correct to roll that amount into your basis.

Customer: replied 1 month ago.
Thanks Len. But the sales price is the sales price. She won't receive a loan above and beyond the sales price for the property. I'll just have to ask for payments that go straight to me for the car note.

The first issue - that any payment you are doing on behalf of the person is considered as a payment to that person.

Thus if you are making a payment to the creditor on behalf of the buyer - that is a constructive payment to the buyer...

What you want to achieve - to have that treated as a reduction of the purchase price - and de-facto that is a REDUCTION.

Regardless of the contact and tax reporting on 1099...

The only issue might - you need to document that payment as a part of the whole selling transaction - and not as a separated gift.

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