Rental property sale with delayed improvements

[Matthew Heffernan]

I've been searching for a while here on BP but have not found a thread related to my situation:

I've been renovating and renting a property for just over 2 years and may be in a position to sell/close in the next 30-60 days.

I am trying to cut-off major projects at this time to make a clean break, however we have committed to replacing windows in one of the units (windows are already ordered), with total project lead-time of 45-60 days (windows have been hard to get for the past year).

In the event we have a closing date PRIOR to window installation, how should we handle paying the contractor?

Do we just lower the sale price by equal amount and the contractor will need to take payment from the new owner?  What if the new owner backs out of the job and gives it to their "regular guy", will the original contractor come after me for any expenses/materials spent?

Do we write a check and have the Title company hold it until work is complete? assuming work completes after closing.

In the event of an audit, is it a red flag if we claim an "improvement" after the closing date occurred?   Thinking about capital gains tax implications.

I hope that's enough info.  I appreciate any responses!

[Jason Watson]

Good question. You can do a seller credit and ask the buyer to execute a new contract with the window guy. This takes you out entirely.

You could hold the funds in escrow, and have the title company release only to the window guy upon your approval. You remain a bit tethered, but control the narrative.

As far as improvement after the closing... I would not be worried. You can easily demonstrate that you were liable for the improvement. A seller credit reduces your cap gains... or having the amount in escrow shows your commitment to the improvement.

Others might have better ideas.

[Michael Plaks]

@Matthew Heffernan

Tax question first, because it's very easy. No problem whatsoever. This is called "costs of selling" and is added to your basis, reducing your capital gain. As long as you can later prove that this money did come out of your pocket, no issue.

As far as your logistics question, let's flip it and consider it from the buyer's side. If I am buying from you, and you plan to do some work on my purchase AFTER the closing, I will not mind, as long as you're going to do it well. If I have doubts, I will want to either strike a deal with your contractor myself (or assume your deal) - or use my own contractor. I will not want to be at your mercy or at the mercy of your contractor after I buy from you or deal with title's bureaucracy.

[Matthew Heffernan]

thank you both for the quick response!   When it comes time to negotiate, the buyer will have his/her opinion on the matter so I’ll be somewhat dependent there, but it’s good to know the tax “mechanics” won’t be an issue and have a few reasonable options.

Quote from @Michael Plaks:

@Matthew Heffernan

Tax question first, because it's very easy. No problem whatsoever. This is called "costs of selling" and is added to your basis, reducing your capital gain. As long as you can later prove that this money did come out of your pocket, no issue.

As far as your logistics question, let's flip it and consider it from the buyer's side. If I am buying from you, and you plan to do some work on my purchase AFTER the closing, I will not mind, as long as you're going to do it well. If I have doubts, I will want to either strike a deal with your contractor myself (or assume your deal) - or use my own contractor. I will not want to be at your mercy or at the mercy of your contractor after I buy from you or deal with title's bureaucracy.

[Account Closed]

Quote from @Matthew Heffernan:

thank you both for the quick response!   When it comes time to negotiate, the buyer will have his/her opinion on the matter so I’ll be somewhat dependent there, but it’s good to know the tax “mechanics” won’t be an issue and have a few reasonable options.

Quote from @Michael Plaks:

@Matthew Heffernan

Tax question first, because it's very easy. No problem whatsoever. This is called "costs of selling" and is added to your basis, reducing your capital gain. As long as you can later prove that this money did come out of your pocket, no issue.

As far as your logistics question, let's flip it and consider it from the buyer's side. If I am buying from you, and you plan to do some work on my purchase AFTER the closing, I will not mind, as long as you're going to do it well. If I have doubts, I will want to either strike a deal with your contractor myself (or assume your deal) - or use my own contractor. I will not want to be at your mercy or at the mercy of your contractor after I buy from you or deal with title's bureaucracy.

 Both are great answers here. I like the idea of just having a seller credit to keep it simple. Like Michael said there should not be any tax related hiccups.