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.”
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.
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