Utility Offers to Buy Home

Today TaxMama® hears from Dean in the TaxQuips Forum with this odd question. “The local power company wants to purchase my home, payoff my mortgage, allow me to live rent free for 12 months; then allow me to purchase the house back for the market value to avoid capitol gains tax. Is this legit? They are installing a new power line through my yard FYI.”

Dear Dean,

That’s interesting. If they own the house while they do all the work, you don’t have to pick up any income or other adjustments for the improvements being done.

In the meantime, if they buy your home, do you have more than a $250,000 ($500,000 if married filing jointly) profit on the sale? And have you owned the house for more than two years? If so, when they ‘buy it’, you won’t have to report the capital gain – just as you wouldn’t have to if anyone were to buy it.

However, the next questions come up – and consider this carefully:

1) What is market value? Is there a maximum price you will have to pay to get your home back? If it isn’t in the contract, beware.
2) Will they provide the new mortgage – or will you have to get your own financing?
3) If you have to get your own mortgage, how is your credit doing?
4) What is your current interest rate – vs. what you can get if you refinance a year from now?

And the biggest worry of all…

5) What’s if you don’t qualify for the new mortgage and cannot afford to re-buy your own home?

Please discuss this carefully with your attorney and/or thoroughly review their contracts.

On the other hand, you could SELL THEM an easement to work on your property for one year, with a fee for an option to renew if they don’t complete the work. That would not be income to you. You would just reduce the basis of your home. And you would not have to worry about refinancing, buying back, etc. Just my thoughts.

And remember, you can find answers to all kinds of questions about bizarre offers and other tax issues, free. Where? Where else? At www.TaxMama.com.

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4 thoughts on “Utility Offers to Buy Home

  1. TaxMama says:

    Not to worry Dean.
    IRS will see the sale.
    They will not see the repurchase.
    And you’ll be staying in the home for some time to come.


  2. dean johnson says:

    Thanks again for replying! Yes, it is the actual power company and we have been in negotiations for about 1yr and I have reviewed the proposal with the town I live in as they are also in negotiations.

    I have lived in this home for 7yrs as my primary so it should qualify for the exemption.

    The tax value at the time I inherited it was about $120k

    The re-qualification for the loan will be a non issue as they have promised to put it in writing that they would hold the 30yr fixed note at 3.5% on 100% 142k purchase price (fyi I am a mortgage broker!)

    My concern is the re-purchase where my primary address wont change between the cap gain free sale and the purchase back…will this open many doors for auditors?

  3. TaxMama says:

    Hi Dean,

    That’s a pretty good deal!
    Get it in writing.
    Make sure their is no problem with qualifying for the replacement loan when the year comes to an end!

    Still open questions.
    You inherited the property.
    What was the value at the time you inherited it?
    Have you lived in it for at least two years (to get the personal residence exclusion)?
    Note: Your basis is not zero. It’s the value at date of death.

    And seriously, make SURE this coming from the utility company, not some pretender.

    Interesting…but not quite done yet


  4. dean johnson says:

    Thank you very much for addressing my “odd situation”

    Here are the basics:

    My current mortgage is $270k
    They just got an appraisal of my home at only $142k (economy issue)
    My basis is Zero (inherited home)
    They will purchase my home for $270k, allow me to live there for 1 year rent free then repurchase the home for the $142,000 and they will hold the 30yr fixed at 3.5% 100% loan to value.

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