House didn't appraise, tax implications

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Ophiuchus
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House didn't appraise, tax implications

Post by Ophiuchus »

I am doing an off market sale to someone I know well. Unfortunately I am in a market where the house did not appraise. We could lower the purchase price of the home and the buyer noted they would be will to pay me the difference over time. Are there any tax implications with this? What if I charge no interest? Thanks
Big Dog
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Re: House didn't appraise, tax implications

Post by Big Dog »

to avoid inputed interest hassle, you should at least charge AFR for the estimated time of the debt.

And yes, you then claim the interest income on your tax return.

https://www.irs.gov/applicable-federal-rates
Topic Author
Ophiuchus
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Re: House didn't appraise, tax implications

Post by Ophiuchus »

Big Dog wrote: Fri Dec 03, 2021 9:18 pm to avoid inputed interest hassle, you should at least charge AFR for the estimated time of the debt.

And yes, you then claim the interest income on your tax return.

https://www.irs.gov/applicable-federal-rates
Awesome idea. Thanks! What is consider "short term" vs "mid term"
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Nate79
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Re: House didn't appraise, tax implications

Post by Nate79 »

Ophiuchus wrote: Fri Dec 03, 2021 9:12 pm I am doing an off market sale to someone I know well. Unfortunately I am in a market where the house did not appraise. We could lower the purchase price of the home and the buyer noted they would be will to pay me the difference over time. Are there any tax implications with this? What if I charge no interest? Thanks
I don't understand why either of you care about the appraisal? If you both were happy about the price who cares about the appraisal?
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Ophiuchus
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Re: House didn't appraise, tax implications

Post by Ophiuchus »

Nate79 wrote: Fri Dec 03, 2021 9:42 pm
Ophiuchus wrote: Fri Dec 03, 2021 9:12 pm I am doing an off market sale to someone I know well. Unfortunately I am in a market where the house did not appraise. We could lower the purchase price of the home and the buyer noted they would be will to pay me the difference over time. Are there any tax implications with this? What if I charge no interest? Thanks
I don't understand why either of you care about the appraisal? If you both were happy about the price who cares about the appraisal?
my understanding is typically the bank will only finance up to the appraisal amount
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Nate79
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Re: House didn't appraise, tax implications

Post by Nate79 »

Ophiuchus wrote: Fri Dec 03, 2021 9:45 pm
Nate79 wrote: Fri Dec 03, 2021 9:42 pm
Ophiuchus wrote: Fri Dec 03, 2021 9:12 pm I am doing an off market sale to someone I know well. Unfortunately I am in a market where the house did not appraise. We could lower the purchase price of the home and the buyer noted they would be will to pay me the difference over time. Are there any tax implications with this? What if I charge no interest? Thanks
I don't understand why either of you care about the appraisal? If you both were happy about the price who cares about the appraisal?
my understanding is typically the bank will only finance up to the appraisal amount
True. Just means the buyer needs to put more money down. If they can't do that they can't afford the house. Ot in other words if a bank won't loan them money to cover it why should you?
barnaclebob
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Re: House didn't appraise, tax implications

Post by barnaclebob »

Nate79 wrote: Fri Dec 03, 2021 9:47 pm
Ophiuchus wrote: Fri Dec 03, 2021 9:45 pm
Nate79 wrote: Fri Dec 03, 2021 9:42 pm
Ophiuchus wrote: Fri Dec 03, 2021 9:12 pm I am doing an off market sale to someone I know well. Unfortunately I am in a market where the house did not appraise. We could lower the purchase price of the home and the buyer noted they would be will to pay me the difference over time. Are there any tax implications with this? What if I charge no interest? Thanks
I don't understand why either of you care about the appraisal? If you both were happy about the price who cares about the appraisal?
my understanding is typically the bank will only finance up to the appraisal amount
True. Just means the buyer needs to put more money down. If they can't do that they can't afford the house. Ot in other words if a bank won't loan them money to cover it why should you?
Because that loan is better than nothing...
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Ophiuchus
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Re: House didn't appraise, tax implications

Post by Ophiuchus »

Nate79 wrote: Fri Dec 03, 2021 9:47 pm
Ophiuchus wrote: Fri Dec 03, 2021 9:45 pm
Nate79 wrote: Fri Dec 03, 2021 9:42 pm
Ophiuchus wrote: Fri Dec 03, 2021 9:12 pm I am doing an off market sale to someone I know well. Unfortunately I am in a market where the house did not appraise. We could lower the purchase price of the home and the buyer noted they would be will to pay me the difference over time. Are there any tax implications with this? What if I charge no interest? Thanks
I don't understand why either of you care about the appraisal? If you both were happy about the price who cares about the appraisal?
my understanding is typically the bank will only finance up to the appraisal amount
True. Just means the buyer needs to put more money down. If they can't do that they can't afford the house. Ot in other words if a bank won't loan them money to cover it why should you?
They were already approved by the bank at the chosen purchase price. The bank just doesn't want to "overpay" for an asset.

At this point I don't want to go through the hassle of putting the house on the market etc
fabdog
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Re: House didn't appraise, tax implications

Post by fabdog »

I am doing an off market sale to someone I know well. Unfortunately I am in a market where the house did not appraise. We could lower the purchase price of the home and the buyer noted they would be will to pay me the difference over time. Are there any tax implications with this? What if I charge no interest? Thanks
so the house didn't appraise, and you have reduced the selling price so that it fits into the appraisal/what the lender will support. This is a common practice, sometimes the seller concedes, sometimes the two parties split the difference with a somewhat lower price and buyer bringing more cash.
So with the path you've chosen, the sale will close and the mortgage will be issued.

Separately, the buyer has agreed to pay you the amount that was knocked off the sale price over time. I am pretty sure the buyer's mortgage company would not approve of that practice, and I'm pretty sure you don't have a formal promissory note from the buyer obligating them to this. If you do, you in effect have a second mortgage on the place, and should be charging AFR interest rates. You will also need to report the extra proceeds (principal) when you report your capital gain... as you got more for the asset than the closing statement will show

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Re: House didn't appraise, tax implications

Post by Jack FFR1846 »

How much is the buyer putting in as a down payment? Are they stretching to keep it at 20%? If so, then I would say "too bad, you can put in 10% or whatever".

We bought our first house. Agreed price was $125k. House was appraised in the very hot Boston market at $114k. We scrambled, sold a car and came up with another $11k so we had the 20% of the mortgage and the extra money needed to buy the house. If we didn't have that ability (I borrowed my parents' spare car for several months), then I guess I'd have gone back to the bank and asked for a higher interest rate loan at a higher percentage rate.

For the OP, I'd be telling the buyer to figure it out himself. If they don't pay the full agreed price and you lower your price, expect you will receive zero ever.
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stan1
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Re: House didn't appraise, tax implications

Post by stan1 »

You could as you say lower the sales price to the appraised price. You'd have to decide whether the amount in question is "worth it" to collect over time. You mention this is a person you know well and it sounds like they don't have the cash to pay the difference now.
twh
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Re: House didn't appraise, tax implications

Post by twh »

Unless you are in a slow sale area, this isn't your problem. The buyer can still get the loan.
tim1999
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Re: House didn't appraise, tax implications

Post by tim1999 »

This is typically handled in today's market by the buyer coming up with a higher down payment to make up the difference. If the buyer can't do that, you find another buyer, not cut the price or do a side-deal to loan the buyer the difference.

If you are loaning part of the down payment to the buyer based on the full purchase price, the lender is going to want to know where that money came from, and that may kill the loan approval. If you try to do this "off the record" by lowering the price and having the buyer sign an "IOU" for the difference that doesn't get recorded in public records, you are taking on a lot of risk that this buyer will stiff you. Even if you recorded it after the mortgage gets recorded, you are second in line behind the mortgage company as a creditor.

I guess it's one thing if you are doing this to help out a friend, if the property has issues/is hard to sell, or you are trying to avoid paying commission to an agent. But otherwise you are probably leaving money on the table and taking on unnecessary risk by doing this "off market" transaction involving carrying back a loan to the buyer.
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