How to cover roof repair before purchase

Question

Hello, BP Community!

I reached agreement with a seller to buy their 12 unit building at a very good price, but the property is located in an area where I'm required to have windstorm insurance because it's location close to the Gulf.  I can get coverage through Texas Windstorm Insurance Association (TWIA), but they would not insure without a new roof that meets their standards.  The bank I'm getting the loan from requires insurance to be in place prior to closing.

Because I'm buying at such a good price, the seller will not pay for the roof.  I have the funds to pay for the roof replacement, and I would pay for it ahead of the actual purchase, but hate loosing on the tax depreciation on installing a new roof since I'll be paying for something I don't own.

Are there any strategies I could use to still claim the depreciation, or any way that the transaction could be structured such that I don't lose on that tax benefit?

Greg Scott · Answer

Talk with your lender about this proposal...

1) Get a solid quote on the roof replacement and share it with your lender.

2) Put the funds in escrow with your bank for the sole purpose of replacing the roof.

3) Close on the property.

4) Install the roof.

5) Get reimbursed for roof expense out of escrow.

Most banks are fine with something like this if they know their downside is covered.  They will probably let you close.

Gino Barbaro · Answer

@Evelyn Randolph

If you replace the roof before you buy, what happens if the sale does not go through? I would see if I could put the money in escrow, and tell TWIA the money is earmarked and ready to go when you do close.

You can also go to another bank. Your question is best left for a cost seg specialist. I can refer you to who we use. Just DM me

Congrats on the deal

Gino

Chizitem Ibeneme · Answer

Great idea! I see you're an expert in Multifamily Investing... Got any advice for someone who's still in college and wants to start rental property investing as soon as they graduate?

Marco Bario · Answer

What if the seller gives you the right to master lease the property now and an option to buy later?

As the lessee, I believe you can expense the roof replacement and then wait to exercise your option.

Ashish Acharya · Answer

@Evelyn Randolph You can structure the roof replacement by setting up an escrow agreement where the funds are held until after closing, allowing you to claim the depreciation. Alternatively, negotiate a credit at closing for the roof cost, reducing the purchase price, or arrange seller financing for the roof. These options ensure you pay for the roof after taking ownership, preserving the tax benefits.

Drago Stanimirovic · Answer

Hi Evelyn,

Congrats on securing a great deal! You're right to think about the tax implications of paying for the roof before owning the property. Here's a strategy that could work:

Escrow Agreement or Seller Credit

One option is to negotiate with the seller to either escrow the funds for the roof replacement or structure the deal so that you fund the roof but receive a seller credit at closing. This way, you would be paying for the roof as part of the property purchase, allowing you to claim the tax depreciation once you take ownership.

Delayed Closing with Roof Contingency

Another approach is to add a contingency to the closing that allows you to replace the roof before closing but delays the actual closing until after the roof is installed and insurance is in place. You’d still be using your funds, but by delaying ownership transfer, the expense would fall under your ownership period, making you eligible for depreciation.

Discuss these options with your tax advisor to ensure everything is structured properly for IRS purposes. Let me know if you need help with financing or structuring the deal further!

Best,

Drago

How to cover roof repair before purchase

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