No the buyers do not have to claim that as income. Unless this has changed in the tax code in the last few years, the buyer can actually deduct those costs on federal taxes. It depends on how the funds are used.

When was the last time you had to claim as "income" money you got from a loan?

That is what most home purchases are. It isn't income.

My thought was the seller is giving the buyers $10,000.00 from the proceeds of the sale of the house to pay for closing costs. Just was wondering if there was any tax ramifications. Thanks.

I don't think the buyer could deduct those closing costs, as they'd show up on the seller's side of the HUD statement at closing.

Not that closing costs are deductible anyway, just points paid to buy down the interest rate, if any.

In any case, it isn't the seller's business (or responsibility)...

We dealt with this (very common) situation, giving $4K back. Kirkhall is right... people think of this the wrong way. The money is coming from the buyer's loan, not the seller's proceeds (although yes, it cuts into the seller's proceeds, but without the deal being structured this way, the sale price would in all likelihood be lower, and so the seller's proceeds would be lower anyway.) It is not a gift. The buyer is basically saying, "I want to pay X for the house, but I need cash (for closing costs, furniture, whatever) so I am willing to finance more than X, and take cash back."

This can get complicated for sellers, as they often (though not always) pay commission on the gross sale price (then it is their loss... but worth it to get the deal done) and the house has to appraise for the full financed amount, not just the amount paid for the house itself.

I was just discussing this idea with someone, because I saw yet another listing where sellers advertise that they are offering cash back. That strikes me as kind of pointless unless they have naive buyers... this is something any buyer can ask for in their initial offer, as in, I agree to pay X plus $5K, and want $5K back at closing. It's all part of negotiation and again, not a gift from the seller.

To that end, I'm pretty certain that the buyer can deduct the seller-paid closing costs from his/her taxes, provided it is for costs that would otherwise be tax-deductible (e.g., property taxes, points, interest). It seems counterintuitive but lizzie_nh's explanation gets to the heart of it--at the end of the day, the buyer is still paying those costs, just not in a traditional way.

(To correct something in my post above, I don't THINK the cash back can cover things like furniture these days. I'm not sure if there is a scenario in which that can still happen, but it did used to be possible before things were tightened.) At the end of the day the "seller-paid" closing costs actually increase the buyer's monthly mortgage payments.

Weedyacres--you are simply incorrect.

Three types of closing costs are deductible: mortgage interest, real estate taxes, and mortgage insurance premiums. (some times sales tax) The buyer can deduct these costs, no matter who paid them, on their taxes for the year in which these items were paid. It's the IRS so it's not "that" simple, but it is "simple."

See IRS publication 530.

Other items can be deducted from the cost basis of the home.

Here is a link that might be useful: Publication 530

This post was edited by rrah on Wed, Jun 11, 14 at 7:00

Thanks for your replies. I was inquiring, not my neighbor. Just was wondering because as I understand it $ from a short sale might have to be claimed as income now....I know apples and succotash! Lol!