Escrow holdback vs Seller Credit

Chicago, Illinois
Tax, SDIRAs & Cost Segregation
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Escrow holdback vs Seller Credit

Amit Rana
Investor · Chicago, IL · Member since 2014 · 15 posts · 0 votes

From a tax perspective is giving a buyer a credit (for repairs) same as putting amount in an escrow holdback? Would the escrow amount count as selling cost and hence my taxable gain? Or does it act more as repair/improvement cost?

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  • Joseph PalmieroBusiness Member
    CPA · PA · Member since 2023 · 151 posts · 115 votes
    3y

    It would ultimately reduce your taxable gain.

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  • Amit Rana
    OP
    Investor · Chicago, IL · Member since 2014 · 15 posts · 0 votes
    3y

    Thanks!

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  • Tim Roberts
    Lender · Salt Lake City, UT · Member since 2023 · 3 posts · 3 votes
    3y

    Are you in a negotiation with the buyer for repairs on an investment property you are selling? At the end of the day, an expense is an expense and would be taken away from your gains. It is best to talk to your CPA or accountant to verify your tax liabilities.

    From a lending stand point it really depends on what the repairs might be? What type of loan your buyer is using to finance their purchase. It's better to give the lender credit towards buyers closing costs. This reduces your buyers cash to close. Then they can fix the repairs themselves.

    The other issue is some lenders will not allow an escrow unless it is seasonal; ie, snow on the roof and you cannot repair. When you give an escrow holdback the lender may require you to get three bids and add 150% of the highest bid to be set in an account for the repairs to be paid. After the repairs are completed the seller recoups the money not used in the escrow account.

    FHA and VA loans can be the hardest to deal with the escrow holdback.

    Give the lender credit because it's a cleaner transaction if there is traditional lending involved.

    Tim

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  • Amit Rana
    OP
    Investor · Chicago, IL · Member since 2014 · 15 posts · 0 votes
    3y

    Yes so the buyer wants the roof replaced (based on inspection) and I agreed to a certain amount seller credit. But they are getting FHA loan and a large credit will get flagged so the solution offered is a escrow holdback.

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