Another rental issue

[Margaret CPA in OH]

The client who bought a second property has some strange entries on the closing docs. This is in a poorer neighborhood so he also received $26,993 in rehab money (line 805), Supl. Orig (Reno) of $408.64 (line 807), a Genesis Gift Fund Credit (line 204), and Credit paid by lender (line 205). I'm really not sure how to handle these items none of which have I seen before and none of which are listed in my handy dandy QF p. 7-3. Any help would be appreciated!

[BulldogTom]

I am guessing - you reduce the basis. The rehab money implies that your client will have to do some work on the property, and that work will increase the basis (most likely given the amount they are crediting). The other credits sound like a reduction of purchase price to me.

That is the best I have on that one.

Tom

Lodi, CA

[Margaret CPA in OH]

Thanks, Bulldog Tom. Are you sure it would reduce the basis if used for improvements? It would seem, since you raised the issue, to increase the basis. I don't know, though.

Any insights about the other land valuation issue I posted a little earlier? That one has me stumped!

[kcjenkins]

Margaret, it will be treated as an offset of the expense, so you could either reduce the basis now, then add to the basis as the rehab is done, or you could set it up as a negative in the 'repairs' expense account, so that you don't add to basis as you pay for those repairs. The point is that while normally those repairs would increase basis, if they are being paid for in advance by the agency, they can't be counted twice.

Think of it like you think of an insurance payment for a storm damage. You don't have to count it as income, but neither can you count the repair as an expense when it's paid out of the insurance proceeds.

[Margaret CPA in OH]

That makes perfect sense. I don't keep the books for the rental but will suggest that the client set up the negative amount and apply expenses against it. I think that will make sense to him and also help him remember that he has that money for that specific purpose. Thanks so much.

The Credits (Genesis Gift Fund and paid by lender) are under a line that says " Existing loan(s) taken subject to." Any ideas what that means?

[OldJack]

It makes perfect since to me that all these items are a reduction in the purchase price which is the taxpayers tax-basis. There does not appear to be any fund setup for rehab nor any requirement that the purchaser ever spend any money on rehab. I also do not understand the Genesis Fund but it again appears to be just a reduction of the purchase price because someone is paying some body for it.