Constructive receipt is an essential term to understand when engaging in a 1031 exchange of like-kind property. In this article, we are going to define constructive receipt and how it comes into play in a 1031 exchange transaction.
What Exactly is “Constructive Receipt”?
Constructive receipt is an important term to be aware of in a 1031 exchange. In particular, it is something you want to avoid at all costs if you want to defer 100% of your capital gains taxes.
1031 exchanges allow you to defer taxes on the sales proceeds of a real estate transaction. However, the catch is that you need to reinvest all of those net proceeds into a new replacement property in order to effectively defer the gains. This incentivizes investors to continue investing and has the added benefit of stimulating the economy. That being said, you are not allowed at any time during the 1031 exchange process to receive any of the sales proceeds. These need to remain in a segregated account until it comes time to reinvest them into your new property. Should you actually receive any of these proceeds during the process – that is known as “constructive receipt” and will trigger taxable boot.
CPEC1031
In any 1031 exchange you want to make sure you are working with a qualified intermediary you can trust. At CPEC1031, our intermediaries have two decades of experience working on 1031 exchanges. We know the process inside and out – and will put our expertise to work for your transaction. Our intermediaries can draft your 1031 documents and answer all of your questions about the process. Reach out to us today at our downtown Minneapolis office to set up a time to chat with one of our experienced 1031 exchange intermediaries.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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