Mortgage Seller Contribution


C

chrisd

Am trying to properly account for "Seller Contribution" listed on my mortgage
settlement statement. Should this be something like "Other Income: Seller
Contribution" in the transaction split, should it be a transfer to the House
asset account, or should it be something else?

What's the best way to do this so that the equity and current value of the
house come out correctly (without affecting accounts that shouldn't be
involved)? Thanks...
 
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D

Dick Watson

You are the buyer? There are costs accrued on your side of the settlement
sheet offset by some contribution from the seller? I'd probably do as you
suggest first: record the expenses and then offset them in the split by some
Other Income:[something]. Either that, or I'd just reduce the expenses by
that amount. I might also think about whether I would want my asset account
initial value lowered by this amount. My thinking is this: I "pay" $10M for
the house but get a kickback (in whatever form) for $9.5M. Do I really want
to think this is a $10M asset?
 
C

Cal Learner-- MVP

Am trying to properly account for "Seller Contribution" listed on my mortgage
settlement statement. Should this be something like "Other Income: Seller
Contribution" in the transaction split, should it be a transfer to the House
asset account, or should it be something else?
It is really a discount, in effect.
What's the best way to do this so that the equity and current value of the
house come out correctly (without affecting accounts that shouldn't be
involved)? Thanks...
"What do you want it to be?"

From a basis point of view to potential capital gains, it reduces
your basis. You could treat it as a reduction in buying price or as
a negative expense.
 
C

chrisd

After agreeing on a purchase price for the house, we basically negotiated
with the seller to INCREASE the contracted price by $xxxx.xx with the
understanding that we would receive the same $xxxx.xx amount back at closing.
What this effectively did was make all of the closing costs (recording fees,
points, title charges, etc.) part of the mortgage and tax-deductible.

Does this help to explain? In this scenario, how does it seem like the
seller contribution should be categorized to you?
 
C

Cal Learner-- MVP

After agreeing on a purchase price for the house, we basically negotiated
with the seller to INCREASE the contracted price by $xxxx.xx with the
understanding that we would receive the same $xxxx.xx amount back at closing.
What this effectively did was make all of the closing costs (recording fees,
points, title charges, etc.) part of the mortgage and tax-deductible.

Does this help to explain? In this scenario, how does it seem like the
seller contribution should be categorized to you?
To ME it would be a discount to the selling price. What do YOU want
it to be?

It is not income. So I think using an EXPENSE category makes sense,
in the sense that you can view it as paying for things you would
have paid for, except that you would not like to view it as
offsetting a mortgage expense. ;-) I did not see that the IRS was
down on this maneuver, but I am not sure of that. If the seller pays
the mortgage points directly, I don't know how that works.

And believe it or not, I did look up "Seller Contribution" before
responding.
http://search.msn.com/results.aspx?q="Seller+Contribution"+mortgage+house&srch_type=0&FORM=QBRE
As far as I can tell, is usually a way for mortgage companies to let
you hedge how much down payment you have for a given rate. They
limit how much you can play that, tho. It can also be used to make
the seller feel more like he got his "price".

I think Dick stated the case well.
 
D

Dick Watson

I'd not change my reply about treating it in Money.

As to unsolicited financial advice: "Tax deductibility" means that the
government will reduce your taxes by a portion (your marginal tax rate) of
the cost of the INTEREST associated with paying for things like that $42
recording fee over the life of your mortgage.

That $42 financed for 30 years at 5% interest results in a repayment of
$81.17. That's $39.17 cost to you to borrow the $42. Now, in the 26% tax
bracket, that means the Feds will offset that by $10.18. You are still out
the remaining $28.98--over and above the $42--just for the privilege of
"deducting" the $42.

You've also increased the mortgage amount to a higher percentage of the
property value than it otherwise would be. As long as you hold on for a long
time and property values uniformly escalate, maybe that's not a big issue.
But if the bottom falls out of the market and get transferred or loose a job
or whatever and are forced to sell out upside down--owing more on the
mortgage than the house can sell for after all of the expenses--you've
assured you'll end up paying what's left of that $42 in the check you write
to sell the property and increased the size of that check because the
property "value" has that much further to fall.

Deductions aren't all they are cracked up to be. If you have to borrow X
amount and only have Y amount of cash to put into the deal and feel
compelled to stretch that far to get the property, so be it. But borrowing
money for the sake of getting a deduction is not a really smart scheme.

Note that for the risk and cost you took on, doing this cost the seller
NOTHING. Of course the seller agreed to it. The wonder is that your lender
did.
 
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C

chrisd

Everything you said is very true; however, if one doesn't have to fork over
that $42 at closing and instead has it available to invest at 10% for that
same 30 years, one could come out ahead...
 
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Dick Watson

There are certainly trades like that in a low interest rate environment.
 

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