Keeping some of the proceeds?

2 Replies

Hello everyone! I’m going to be listing a rental property within the next several days, and I came across a 1031 exchange question I hadn’t considered. There are some up front costs such as inspections and HOA document fees that we are going to have to pay. Once the rental property sells, are we allowed to reimburse ourselves those up front costs from the sale proceeds without it being taxable? Also, on our taxes last year we had some losses that we couldn’t use that are going to carry over. I was wondering if we could technically take some of the proceeds out to have more reserves on hand and use those future losses as a way to offset the gains from keeping some of the sale proceeds. Hope that makes sense! Look forward to everyone’s insight! Thanks!

@Josiah Collins , Costs of the sale can be paid with proceeds but must be on the settlement statement as costs of the sale.  You cannot receive the funds as a reimbursement or they will be taxable to you.

Regarding offset losses, the IRS really doesn't care too much how much profit or loss you have on a property.  If you want to do a 1031 exchange and defer all tax you must do two things.  First you must purchase at least as much as you sell.  And second you must use all of the proceeds in the purchase. 

If you take cash out the irs perceives it as taking profit even though you think of it as replacing losses.  So if you take cash out either at sale or purchase you will pay tax on that amount.  But if you're willing to do that it doesn't disqualify your exchange.