What is Retained Property? Retainage vs. Retained Rights Explained for NY Investors

Category: Real Estate Education | Read Time: 5 Minutes

If you’ve ever been confused by the word “retention” in real estate, you’re not alone. I’ve seen countless property owners—smart, capable people—get tripped up because this one term can mean two completely different things depending on whether you’re building something or selling something.

At WeBuyPropertyNY, we’ve helped hundreds of homeowners navigate both scenarios. Whether you’re managing a renovation or considering a creative sale arrangement, we’re here to make sure you’re protected every step of the way.

Part 1: Construction Retainage (Your Financial Safety Net)

If you’re developing or renovating property anywhere in New York, retainage isn’t optional—it’s essential. And here’s the thing: it’s not about punishing your contractor. It’s about making sure everyone finishes what they started.

How Retainage Actually Works

Why does this matter?

• The Incentive: Contractors are running businesses. Without retainage, some might be tempted to move on when a project is 95% done, leaving you with unfinished punch list items. Retainage keeps everyone motivated to cross the finish line.
• The Protection: If your contractor ghosts you or refuses to fix defects, you’ve got funds set aside to hire someone else to make it right.

When Do You Release Retainage? (Understanding the “Punch List”)

This is where I see people get nervous. Here’s the typical timeline:

• Substantial Completion: This is the milestone where your building can actually be used for what it was built for. In New York, this often coincides with getting your Certificate of Occupancy.
• The Punch List: You and your architect walk through the property looking for the little things: a scratched hardwood floor, a missing light switch cover. All these items go on the “punch list.”
• Final Payment: Once your contractor completes every single item on that punch list, you release the retained funds.

Part 2: Retained Rights in Property Sales (The Legal Puzzle Pieces)

Now let’s switch gears and talk about selling property—but not giving up everything when you do. Real estate ownership is often described as a “bundle of rights.” When you sell, you don’t always have to hand over every single stick in that bundle.

Common Examples of Retained Interests

• Life Estate: A Life Estate lets you (or your parents) stay in the home for the rest of your life, even though someone else technically owns the deed. It’s a beautiful solution for families navigating difficult transitions.
• Easements: You sell most of the land, but you retain an easement—a legal right to cross that property to reach a lake or road. You’ve sold the land, but kept access to what matters most.
• Mineral or Air Rights: In dense areas like New York City, you’ll sometimes see owners sell their building but hang onto the “Air Rights” to sell to a neighboring developer later.

Part 3: The Financial Reality of Retention

Tax Implications You Need to Know

Proper documentation isn’t just good practice, it’s required for IRS compliance.

• Construction Retainage: If you’re a developer, withheld retainage usually isn’t deductible as an expense until the liability is fixed—meaning, until the project is officially certified complete.
• Retained Life Estates: If you sell your property but keep a life estate, the tax basis gets split between your retained interest and the remainder interest. Getting this calculation wrong can cost you dearly.
• 1031 Exchanges: If you’re using a 1031 exchange, understanding exactly what rights you’re keeping or giving up is critical to ensuring properties are considered “like-kind.”

The Cash Flow Conversation

For contractors, retainage can feel like a cash crunch. For property owners, it’s a tightrope. High retention rates protect you, but if you withhold too much, your contractor might not have enough liquidity to finish the job. It’s about finding the right balance.

Part 4: Legal & Regulatory Considerations in New York

Real estate law isn’t one-size-fits-all. New York state has specific statutes governing retention to protect both parties.

Contractual Clarity is Everything

• For Construction: Your contract must spell out the retention percentage (typically 5-10%) and the exact conditions for releasing those funds. No ambiguity.
• For Property Sales: If you’re keeping a Life Estate or any other right, it must be explicitly documented and recorded in the deed. Verbal agreements mean nothing here.

Insurance and Risk Management

During Construction: You’ll typically need “Builder’s Risk” insurance to cover the property. Make sure your contractor has proper liability coverage too.

With Life Estates: Generally, the “Life Tenant” handles day-to-day maintenance and basic insurance, while the “Remainderman” protects the structural integrity.

Final Thoughts

Retainage isn’t about being difficult—it’s about protecting quality. Retained rights aren’t just legal jargon—they are tools for flexibility. At WeBuyPropertyNY, we understand that every situation is unique, and we genuinely care about helping you make the right decision.

Frequently Asked Questions