Where the money sits,
and what tax applies
Three things every buyer runs into: how the purchase funds are protected, what you owe while holding and on sale, and how an exchange defers the gain.
1. Where the money sits
Money and title move through escrow — a neutral third party that answers to neither buyer nor seller.
In California an escrow company is a separately licensed entity regulated by the Department of Financial Protection and Innovation, and it holds client funds in trust accounts kept apart from its own money.
Funds release to the seller only when every condition has been met — title transferred, title insurance issued, existing liens cleared. Until those are confirmed, escrow holds the money. If conditions fail, the money returns to the buyer.
The broker never touches these funds. Neither we nor any other agent holds or routes purchase money. It goes from your bank directly into the escrow account, and those account details come from the escrow company itself.
One warning. Wire fraud targeting escrow instructions is common and getting worse. Never trust account details received by email at face value — call the escrow company directly to verify, using a number you already had. We will walk you through the same verification.
2. Tax
While holding — rental income
You are not taxed on gross rent. Depreciation, mortgage interest, property tax, insurance, management fees, and repairs are deductible, so taxable income is normally far below gross collections.
Depreciation matters most. The building portion of a residential rental is written off over 27.5 years — an expense that reduces taxable income without any cash leaving your pocket.
On sale — FIRPTA withholding
When a foreign person sells U.S. real property, FIRPTA requires the buyer to withhold a portion of the sale price and remit it to the IRS. The default rate is 15% of the gross sale price. It is worth knowing from either side of the table: as a seller it is money you have to reclaim, and as a buyer it is your obligation, not the seller's.
The common misunderstanding: this is not the final tax. It is a prepayment. Actual tax is computed on the gain, and filing a return reconciles the difference and refunds the excess. Fifteen percent of the sale price is not what is owed.
Where withholding would exceed the expected liability, a seller can apply before closing with Form 8288-B for a withholding certificate to reduce it. This keeps funds from sitting with the IRS, and the application must be made before closing.
3. The 1031 exchange — deferring the tax
When you sell investment property and move into another, meeting the conditions lets you defer rather than pay capital gains tax. It is called a 1031 exchange, after the section of the tax code, and it is the main way real estate investors compound equity.
What it gets you
Tax on the gain from the property you sold is postponed until you eventually sell the replacement. Money that would have gone to tax stays as equity in the next building, letting you step up into larger assets. Repeating this is the ordinary path to building a portfolio.
Two deadlines — and neither bends
From the day after your sale closes, you have 45 days to identify the replacement property in writing and 180 days to complete the purchase. Both clocks run together — use all 45 days to identify and you have 135 left to close. These deadlines are not extendable. Miss by one day and the entire exchange fails and the tax comes due.
You cannot touch the money
Sale proceeds must be held by a Qualified Intermediary. If the seller takes receipt of the funds even briefly, the exchange is disqualified at that moment. The QI must be engaged before the sale closes; after closing is too late.
What you can move into
Investment and business real property qualifies broadly. Apartment building to apartment building, of course, but also into retail or other commercial property. A home you will live in does not qualify.
If the seller is a foreign person — it collides with FIRPTA
A 1031 exchange defers tax, but FIRPTA withholds 15% at the sale. Once that money goes to the IRS, the exchange is short by that amount.
The fix
Obtain a Form 8288-B withholding certificate before the sale closes, on the basis that gain recognition is deferred through the exchange. With the certificate in hand, the sale can proceed with reduced or no withholding.
Sources: IRS — Publication 527 (27.5-year depreciation) · FIRPTA Withholding (IRC §1445) · Like-Kind Exchanges (IRC §1031) · Treas. Reg. §1.1031(k)-1. Verified July 28, 2026.
Find out how this applies to you
Tell us the amount and the timing and we will lay out the order things need to happen in. We can connect you with tax and legal advisors for their part.
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