Wierd Real Estate Sale

[Max W]

Clients sold an investment property that had needed a remodel.  They hired some flaky contractor and promised that part of the payment would be a small percent from the sale of the property.   Unbeknownst to the clients. there were liens against the contractor.   With the contractor now on title to the property, the lien holder filed liens on the clients property.

When the property finally sold, the contractors liens were paid off.   Can these liens be deducted as a selling expense?

[Gail in Virginia]

It sounds to me like the contractor's portion of the proceeds would include the liens that were paid off rather than treating them as an expense of the sale.  So your client would report the sale proceeds that he received, and if the 1099S was issued solely in his/her name would report a nominee amount to the contractor of the proceeds that the contractor received either in the form of cash or as payment of liens against the contractor.  Not sure I am stating that clearly.

[DANRVAN]

Report the gross as income and the amount withheld as expense.

For the amount withheld, issue 1099 NEC to contractor for his work.

[Pacun]

See below

 

[Pacun]

Just now, Pacun said:

It seems to be simple as Danrvan has said.

Cost of the house =300K
Improvments= 10K cash given to contractor plus liens paid which total $100K
Adjusted basis to the house $410K

Selling price $700K
selling cost $20K
Profit $270K.

1099 to the contractor = $110K. if improvements were only $50k, then client should have an unforseen loss of $60K... and I guess that's why the question was posted. 

The tricky part is if the contractor didn't do any improvements but rather only repairs.

 

 

[DANRVAN]

47 minutes ago, Pacun said:

The tricky part is if the contractor didn't do any improvements but rather only repairs.

It will either be an expense to sell or addition to basis, but the net will be the same since the property was held for investment.

[DANRVAN]

14 hours ago, DANRVAN said:

issue 1099 NEC to contractor for his work

On second thought, most likely not a trade or business so no 1099 issued.

[Pacun]

I think you still have to give a 1099-NEC to the contractor who makes improvements to your house if you want to take a deduction or tax break... even in your primary residence.

[mircpa]

@Max W

Issue 1099 for whatever amount paid to contractor prior to and subsequent to sale & mark that as expense OR increase basis

[Lee B]

Filing a 1099 is required for payments made by a trade or business and rental property owners.

Since the OP post said this was investment property I would argue that filing a 1099 is not required in this situation.

[Lion EA]

He can issue a 1099 if he wants to, and he might want to -- to document all the funds that went our to that contractor.