What is “Constructive Receipt” in a 1031 Exchange?

 Constructive Receipt 1031 Exchange

There are many terms and definitions in the realm of 1031 exchanges that can be confusing to anyone outside the real estate or tax industry. In this article, we are going to explain what “constructive receipt” means in a 1031 exchange and offer some tips for avoiding it.

Constructive Receipt

In 1031 exchange terms, “constructive receipt” means that the person conducting the 1031 exchange has obtained control over the sales proceeds (either directly or indirectly). Why is this bad? Because it violates one of the fundamental rules of the 1031 exchange – that you must move all of your exchange proceeds into a replacement property.

When you effectively receive your sales proceeds you have just received income that is subject to capital gains taxes. This is exactly what you’re hoping to avoid when conducting a 1031 exchange.

The Role of the Qualified Intermediary

One of the many benefits of working with a qualified intermediary during your exchange is that they can insulate you from receiving any of the net proceeds from the sale of your relinquished property. They do this by holding the net proceeds for you during your exchange period and transferring them over to the replacement property at the time of closing.

Twin Cities 1031 Exchange Services

The Minnesota qualified intermediaries at Commercial Partners Exchange Company have been helping taxpayers with their 1031 exchanges for decades. If you’re looking to defer taxes on the sale of real property, contact us today for help with your exchange. Our intermediaries can prepare all the necessary documents for your exchange, and advise you on best practices every step of the way. Contact us today at our downtown Minneapolis office to get started with your exchange.

  • 1031 Hotline: If you have questions about 1031 exchanges and constructive receipts, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

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