Replace Roof before selling?

3 Replies

Hello everyone, new to forums so I'm not sure if this is the right place to post but hope it is! So here's our dilema- we have rental property in AZ which we are wanting to sell and do a 1031 exchange on it- but now it turns out the roof needs to be replaced- so the question is do we replace before selling or try and sell as is and give some type of roof allowance? if that's even possible-

if we replace, would we be able to deduct the full cost/expense on our taxes? I've read that usually the cost becomes a depreciation but how does it work if we sell in same year? hope this makes sense and someone can give us much needed advice! thnx!

@Saul Trejo , A very interesting and common dilemma.  From a marketing perspective its a question of selling as is and strategically negotiating price for repairs vs. expending a bunch of money right before a sale to anticipate buyer desires.  I'm an optimist with low expectations.  So when I sell a property I always hope that the buyer simply accepts the property but my experience is that the inspection is really just round 2 of negotiations.  

Since that's the way it goes I tend to minimize my pre-emptive improvements and grind them out with the buyer in the inspection portion of the negotiations.  Very interesting studies on human behavior will tell you that there are limitations on what people are willing to ask for so they don't insult you.  And if the inspection report comes back with an entire roof and a bunch of little stuff a buyer is less likely to demand the little stuff along with the roof.   

From an accounting side, I believe our accounting friends will verify that you are right, replacement of the roof adds to your depreciable basis.  If you sell without a 1031 it all goes into the wash that is your recognized gain.

But if you 1031 and have a sales concession of a $ amount for a roof then that impacts your net sale.  This in turn lowers the amount of your reinvestment requirement for the 1031.  And you don't have to dip into outside exchange funds to do the roof.

I'd say those two things along with the hope for a lazy inspector who forgot his ladder tip the scales to wait and see what the inspection says.

I think you’ll get more interested buyers if they know they don’t immediately need to sink thousands in repairs. Some investors won’t care, but some who are looking for more of a turnkey experience, will walk away.

Is everything else in the property good and above average? You’ll typically get the best price if everything is in working order.

You can offer a concession of $xx with the knowledge that the roof needs to be replaced. Or drop the price a corresponding amount.

Originally posted by @Saul Trejo :

Hello everyone, new to forums so I'm not sure if this is the right place to post but hope it is! So here's our dilema- we have rental property in AZ which we are wanting to sell and do a 1031 exchange on it- but now it turns out the roof needs to be replaced- so the question is do we replace before selling or try and sell as is and give some type of roof allowance? if that's even possible-

if we replace, would we be able to deduct the full cost/expense on our taxes? I've read that usually the cost becomes a depreciation but how does it work if we sell in same year? hope this makes sense and someone can give us much needed advice! thnx!

 I believe you'll be in a better position if you replace the roof. Most buyers are looking to minimize their out of pocket expenses by maximizing their leverage. For every dollar they are spending they are able to quadruple their buying power since 25% down is all that's needed on a rental property. If your roof costs $6,000 that's $6,000 they aren't able to turn into $24,000. So they'll want a discount that is disproportionate to the actual cost of that roof. Perhaps it lowers your sales price by $12,000 instead of only $6,000. Point being you will end up ahead of the game if you just pony up the coin & replace the roof prior to selling.

James Wise, Real Estate Agent in OH (#2015001161)

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