Disclaimer: I am not a CPA, financial adviser, tax planner, lawyer or anything close to any of these things. Rather than do exactly what I say here, you should consult with your own CPA to determine how you should distribute funds from a sale.
Note that different companies and different individuals distribute the sale proceeds differently. This is just a high level description of our general approach. Generally there will be three separate payments, as follows:
- Return of your initial investment amount
- Return of a major portion of the gains
- Return of any final remaining funds
Return of your investment
We like to do this as soon as possible after the sale and usually within a week of receiving the cleared funds.
Return of a major portion of the gains
In the 30 days following the sale, we make sure that the major vendor accounts and utilities have all been settled up and closed out cleanly. Any pro-rations due from the buyer (depending on the sales contract) should also be addressed at this time. Once this is done then, working with our CPA we determine how much to distribute while holding back a cushion to wrap up the business.
Within 30-45 days of the sale we estimate the amount of money needed to wrap up the business and return the rest. Depending on the specific details of the investment, this is usually the biggest single distribution and the main one people get excited about.
Return of any final remaining funds
In the final stage of the wind down, we need to:
- Ensure that any remaining utilities deposits have been returned.
- Unused escrow should be returned by the former lender assuming that the loan was paid off in full. [In the case of an assumption then the unused escrow generally stays with the loan.]
- Unused insurance premiums should also be returned from the insurance provider. This one can take a couple of months after cancellation.
- The CPA can then prepares the final tax return and associated K-1s.
- Prepare, file and possibly pay any Franchise Taxes (depends on the State in which the company operates).
As a rough rule of thumb, the funds needed to wrap up the business are approximately equal to the monthly operating expenses of the property under normal operations.
After preparing the final tax return, distributing 1099’s and preparing investor K-1s we work with our CPA to come up with an amount for the final (usually small) distribution. At this point our CPA is able to provide us with a final bill so we hold back enough to pay them and any other monthly recurring payments as long as needed. Then we distribute that final amount – usually about 1% additional return.