Cost basis (DR & CR)

[ILLMAS]

I need help with accounting for this transaction, business bought a building for $300K, the seller gave them an $80K credit = $220K, I am trying to figure it out if the basis of the building should be $300K or $220K and how would I offset the $80K if the basis should be $300K?

Thanks

Marco

[Lee B]

When you say credit, do you mean the seller discounted the sales price from 300 K down to 220K,

or is it more complicated than that ?

[BLACK BART]

I think it should be recorded at $220K which is what he actually paid - I don't see how a discount would have any effect on the depreciable basis of an asset.  

[ILLMAS]

I'm helping a friend on this one, I requested a copy of the settlement statement and the seller gave the buyer a $80K closing credit, initially I had thought the buyers closing cost was $80K and the seller simply gave them the credit to bring it back to $300K contracted price, but now it seems the buyers basis is $220K or should it be $300K and report $80K as income?

[BLACK BART]

Unless the $80K is a gift from a friend or relative selling the property to him at a below-market price, then it has no effect.  I can't imagine why it's even on a closing statement other than to impress on the buyer what a great bargain he's getting. The cost is the cost and the $80K made-up figure is nothing to him (certainly not income-by that reasoning the seller could enter a million dollar sale price less a $780,000 credit and your friend would be in a fix).     

I'm assuming the buyer is interested in tax basis - here's the IRS Pub. 551 take on that (check out page 2).

https://www.irs.gov/pub/irs-pdf/p551.pdf

[Gail in Virginia]

Main reason that sellers pay closing costs rather than cutting the price has always seemed to me to be because the real estate agents convince them that it is a good idea.  They like it because their commission is calculated on a higher number.   Maybe that isn't it, but that was what always struck me.

[ILLMAS]

1 hour ago, BLACK BART said:

Unless the $80K is a gift from a friend or relative selling the property to him at a below-market price, then it has no effect.  I can't imagine why it's even on a closing statement other than to impress on the buyer what a great bargain he's getting. The cost is the cost and the $80K made-up figure is nothing to him (certainly not income-by that reasoning the seller could enter a million dollar sale price less a $780,000 credit and your friend would be in a fix).     

I'm assuming the buyer is interested in tax basis - here's the IRS Pub. 551 take on that (check out page 2).

https://www.irs.gov/pub/irs-pdf/p551.pdf

I believe there is an incentive to the seller from the government in this case.

[MDCPA]

Assuming when a property is listed that a real estate agent pulls comparable sales when determining the listing price, then paying closing costs, rather than reducing price helps maintain the real estate values in the area.

[Richcpaman]

To follow up with MDCPA.  The number reported in all the official places, is the $300k figure.  It does help support the local tax base.

And yes, the realtor got an extra $4800 in commissions as well....

That is a pretty big discount however.

One way to remember these deals is to do the opposite side.  What if the seller came to you?  What would you report as the net selling price?  That will give you your approximate basis to the buyer.

Rich