Money back for improvements, but not in my name - Posted by Jason

Posted by Randy (SD) on May 05, 2005 at 13:06:56:

IMHO it’s a wash, do you have a contractor lined up to do the work? If so have the check made payable to them to be held in trust or as a deposit for advance payment on the contract. Even if you had the check payable to another person/partner who holds the money until the work is needed, it’s still a wash as long as they pay for the work when it is performed assuming it’s performed in the same calendar year. In May 2005 I receive $20,000 (taxable income) in November 2005 I spend $20,000 on rehab (taxable deduction)… net taxable gain $0.00

Money back for improvements, but not in my name - Posted by Jason

Posted by Jason on May 05, 2005 at 12:37:27:

I recently purchased a fixer-upper and the loan was structured to include an additional 20k for home improvements. The problem is the money can not come back to me as it is supposed to be paid to the person(s) doing the construction. My problem is that I will not be doing the improvements for another 6 months and the title company can not hold on to the money for more than 30 days.

My question is:
If have the title company send the check to another person/partner who holds the money until the work is needed, do they incur a tax cost, i.e. is the money perceived as profit for which they should pay taxes?

I guess this is the problem when one doesn’t think things all the way through prior to signing the contract.

Any info/advice would be helpful.

Thank you

Re: Money back for rehab, but not in my name - Posted by John B. Corey Jr.J

Posted by John B. Corey Jr.J on May 06, 2005 at 08:40:26:


You might have a big problem. Lets agree you should have seen this coming before the sale closed.

  1. Can you transfer the funds to another escrow who will hold it until you are ready?

  2. What are the conditions the lender put on the funds? Most of the time they can only be released when the work is done, not when you tell the title company to pay someone. You may need receipts for the work, pictures and a possible inspection.

  3. The title company has some liability in that they can only release the funds based on instructions. If you can not meet the requirements the funds will go back to the lender in most cases. If that is to happen can you borrow funds in 6 months to get the work done?

  4. You are paying interest on the money and yet you are not effectively using it. Why? What is the delay in getting the work done? If you put your mind to it is there any way you can restructure things and complete the work not as opposed to 6 months?

I would focus on solving getting the work done now and less on letting $20K sit in escrow. Is the property rented or otherwise producing income presently? If it is ‘idle’ and the $20K is ‘idle’ you are not productively working the assets.

Maybe we need more of the background to be more helpful with the advice.

Oh, I would never pay a contract in advance. A lot can happen in 6 months. If the company goes under or the person dies you are hosed. If you do pay in advance make them put up a performance bond so you are guaranteed the work will be done one way or another. It is not cheap but they are common. The amount you are looking at is small but I think you can find someone to issue the bond. I still doubt the lender will allow the funds to be released.

John B. Corey Jr.
Chelsea Private Equity LLC