How to move money for 1031

Question

Team,

Here is a scenario. I am currently in escrow since I am selling an investment property along with a partner. At the end of escrow, I will get close to 300K but out of which $15 to 20K is the profit.  so I am subjected to pay taxes for 20K profit.

Where do I keep this 20K ? in my personal account to reinvest if I can invest in the next 180 days to defer taxes? Please advise.

FYI- I am already looking for more properties and I am sure I will get one before the due time,

Dave Foster · Answer

@Pandu Chimata, Echo what @Frank Chin said, the only way to avoid those taxes is with the 1031.  And  your qualified intermediary must be in place prior to the closing of the sale.

Being a CA resident you could be looking at a 30% tax (welcome to the 2nd highest tax in the world behind Denmark).  And you've got whatever depreciation recap would be.  I would take a look at your target markets for replacement property.  If there's inventory the 1031 won't cause you added heartburn.  And it will save you some money.  If you're looking for unicorns in the market then the relatively small amount of tax is probably worth paying so you can hunt the elusive unicorn (whatever that is).

Frank Chin · Answer

I don't know if you checked with a CPA, but does the profit calculation include depreciation recapture.

Also, ALL the money you take out has to be held by a 1031 intermediary, you can't touch it. And if the profit is as small as you said, if correct, I would skip the 1031, and pay the taxes. You are under time constraints to do a 1031, and it can lead to you doing  bad deals.

Basit Siddiqi · Answer

@Pandu Chimatait is unclear from your post if the total gain is 20K or if you and your partner each have 20K of gain.If we are talking about 40K of gain - you and your partner would be saving $12,000 of taxes(based on Dave's suggested federal and state tax rate).After an approximate $1,000 fee for the use of a 1031 intermediary - there is a potential of $11,000 of savings if you do a 1031.It is something you should consider if you plan to continue investing in real estate.

How to move money for 1031

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