How to handle home purchases with furnishings

In Southwest Florida, furnished home purchases are much more common than in other parts of the US. This is due to the strong second home / vacation home market in the area. The thought of walking into a furnished home may seem ideal and easy, especially if you really like the furnishings. However, how to handle the furniture in the transaction is worth careful consideration.

There are a number of considerations to think about when pursuing a furnished home (or a turnkey one, which means everything including the furnishings stay... plates, linens, etc.).

• Condition... is the furniture in  good enough condition that you would want it?
• Style... does the furniture meet your decorating and comfort preferences?
• Costs... what do you think the furniture is worth?
• Structure... what is the best way to structure the deal to account for furniture?

Condition and Style
The big factor here to think about is whether there is value in including the furnishings as part of your purchase. If you like the furniture and would plan to keep it for a reasonable amount of time, then it may be worth it. If that is the case, be sure to look closely at the condition and comfort of the pieces. I have seen many buyers purchase a property with furnishings only to turn around and buy new stuff two months later because they didn't care for it. If that is part of the plan to start with and there isn't much value being places on the furnishings in the home sale, perhaps that could be ok for you. Otherwise, you are better to purchase the home unfurnished and select your own furnishings after the close.

Costs
Assuming you like the furniture, the next thing to determine is whether the seller is pricing it at an amount that makes financial sense. I always suggest looking at other comparables to get a sense of the home value versus any additive cost that was factored into the list price. The sellers don't typically attach a price to the furnishings but rather come up with what they believe is a fair and reasonable price for the home if furnishings are included. Relative to cost, remember that if a home is listed as unfurnished or furnishings negotiable the list price is what they are asking for without those items factored in. This means you often have to pay more to add furnishings in if they are even willing to do it. Also keep in mind that listings that are noted as furnished may not always go down in purchase price just because furniture is removed from the offer. Sometimes, if the seller doesn't value the furniture as much, it may be more of a burden on them to arrange to have the furniture removed and therefor changing the deal to unfurnished may not be as attractive.  It is also important to keep in mind that perceived value can differ greatly between the parties so factoring furnishings when parties don't necessarily agree on value can muddy the negotiating waters.

Structure
How you handle the sale of the furniture is also important, especially if you are financing the home. The home, without the furniture, needs to appraise at any appropriate amount to satisfy the lender. Additionally, there may be extra steps required when lenders and appraisers see furnishings being included in the purchase price. They may require the parties to itemize and substantiate value of the furnishes to determine the "true" value of the home. Including the furnishings in the purchase price also means that the recorded home purchase price could potentially impact assessed value for property taxes. You can also handle the furniture as a separate bill of sale and pay the seller directly for these furnishings. Keep in mind this creates a sales tax situation for the buyer.

You should also consider how you plan to use the property to help you land on the best option for you. Investment property, including furnishings, can be depreciated for Federal income tax purposes - these laws change frequently, but real property (minus the land) can be depreciated over 27.5 years (Note: Land cannot be depreciated). To add to the confusion, furnishings may be depreciated over 7 years. Depreciation can help the landlord save taxes against their rental income. However, when selling the property after taking depreciation deductions for many years, that party will likely owe much more in federal taxes. 

Your real estate agent is not an accountant and cannot give you financial advise on how to handle the furnishings as a part of your transaction. As such, I always recommend that the Buyer  take a couple of potential actions to help them decide.

• Talk to your accountant. They can help you evaluate the Federal tax implications. For example, the Seller may have totally depreciated the furniture, and partially depreciated the real property. Agreeing to any amendment to the purchase price may ultimately hurt the Seller when filing their tax return for the next year.
• Call the County Property Appraiser’s office and ask how the ad valorem tax is calculated - The appraisers in this area usually looks at comparable properties and make adjustments for differences in size and location - not necessarily the sales price! Frequently, the Buyer will learn the allocation will not save much in ad valorem tax AND their income taxes could suffer. The Collier County Property Appraiser’s office has a Customer Service (Real Property) number at 239-252-8141. NOTE: Buyers will get a questionnaire from the Appraiser’s office after the closing to help determine if the sale was an “arms length” transaction, and whether other consideration, like furniture, were part of the sale. If the furniture was included, you may want to tell the Appraiser when the questionnaire is received. It may help lower the ad valorem tax, while maintaining the maximum tax basis for Federal Income Tax purposes. This may save the Buyer Federal taxes when the property subsequently is sold.