One Mistake that Can Sink Your 1031 Exchange: Constructive Receipt (“Taking Boot”)

When it comes to completing a successful 1031 exchange, few mistakes are as costly, or as common, as accidentally triggering constructive receipt. Investors sometimes call this “taking boot,” but whatever the label, the result is the same: your tax deferral may be jeopardized.

What Is Constructive Receipt?

Constructive receipt occurs when the IRS determines you had actual or potential control over your exchange proceeds. You do not have to physically cash a check or deposit money into your account for it to count. Even brief or indirect access to funds can trigger constructive receipt in the eyes of the IRS. And, if the funds are available to you in any way, even for a short time, the exchange is likely “off the table.”

For example:

• If your sales proceeds are wired to your personal account, even for a day, you have taken actual receipt.

• If the check from closing is made payable to you, you have taken constructive receipt.

• If you instruct the closing agent to hold the funds “until you decide what to do,” that too can be seen as constructive receipt.

• Having the funds held by your agent, your employee, or a relative can be construed as constructive receipt.

How “Boot” Fits into the Picture

The term “boot” refers to any cash or non-like-kind property you receive during a 1031 exchange. Boot is taxable in the year of the exchange, even if the rest of the transaction qualifies for deferral.

This means:

• Taking all proceeds in boot = no valid exchange.

• Taking some proceeds in boot = partial exchange. You may defer tax on the reinvested portion but owe tax on the boot.

It is easy to see why constructive receipt and boot get conflated. In both situations, the investor winds up with taxable money in hand.

How to Avoid Constructive Receipt

The good news? Avoiding constructive receipt is straightforward if you plan ahead. The IRS requires that exchange funds be placed in the hands of a Qualified Intermediary (QI), not the taxpayer.

Here is what that looks like in practice:

1. At closing, your sales proceeds are wired directly to your QI, never to you.

2. The QI safeguards the funds during your identification and exchange period (preferably through a separate, segregated bank escrow account.)

3. When you close on your replacement property, the QI wires the funds directly into that purchase.

By keeping your funds out of reach, the QI eliminates constructive receipt and ensures your exchange complies with IRS safe-harbor rules.

Why This Matters

Receiving funds can be an innocent mistake. For example, a poorly worded instruction at closing, or a misunderstanding of the rules could result in receipt. But the consequences are serious. Once receipt occurs, the exchange may be disqualified. Unfortunately, there is no reset button.

Find Out if a 1031 Exchange is Right for You

Find out if a 1031 exchange is right for you by contacting the qualified intermediaries at CPEC1031, LLC today. Our team has over twenty years of experience working on 1031 exchanges of all shapes and sizes. We have the skills and expertise needed to make you feel comfortable and confident throughout the exchange process. Contact us today to learn more about the like-kind exchange process and see if your property qualifies for 1031 exchange treatment under the Internal Revenue Code.

• 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Video – Actual or Constructive Receipt of 1031 Exchange Proceeds

When you’re doing a 1031 exchange, you usually hire a qualified intermediary or other exchange facilitator to help bolster the structure of the exchange, but also to insulate you from receiving the proceeds from the disposition of your relinquished property. This entire apparatus is set up to insulate you from receiving these proceeds. If you were to receive the proceeds, either actually or constructively (for example, by having your accountant or attorney receive the funds on your behalf), you would be blowing the 1031 exchange because you have control (either directly or indirectly) of the sales proceeds. That jeopardizes the 1031 exchange because the rationale for 1031 is that you are not cashing out. If you’re able to take the cash off the table, then it is an invalid 1031 exchange and you cannot defer your capital gains taxes.

Find an Experienced 1031 Intermediary Near You

If you’re considering a 1031 exchange of investment real estate, it’s a good practice to work with a qualified intermediary throughout the process. Find an experienced 1031 intermediary near you by contacting CPEC1031, LLC. Our team of intermediaries has decades of experience facilitating like-kind exchanges across the United States. No matter where your property is located, we can help you defer your taxes under section 1031 of the Internal Revenue Code. Reach out to us today to set up your appointment with one of our 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Can I Sell a 1031 Exchange Property After Only One Year Without Penalty?

1031 Exchange Investor Question:

I purchased a property last year in a 1031 exchange. I now want to sell this property along with another property and 1031 exchange into something else. Is there any penalty for only owning the property for one year?

The Bigger Question: Why Sell?

Before we get into IRS rules and timelines, the first step is understanding your motivation for selling. Are your revenue and expense projections not lining up with reality? Has the neighborhood or market shifted in a way that makes the property less desirable for your goals? Or is your strategy evolving, and you want to move your capital into a different kind of property?

Your intent as an investor matters and that intent is at the heart of whether your 1031 exchange qualifies.

Understanding the 1031 Exchange “Holding Requirement”

One of the most common myths about 1031 exchanges is that there is a hard-and-fast rule about how long you must own a property before selling. The IRS has never set a specific minimum holding period in the tax code or Treasury regulations.

Instead, the key concept is qualified intent that you acquired the property for investment or business use. Proving that intent is a facts and circumstances test, not just a calendar test.

What the IRS Says

While no official timeframe is mandated, we can look at IRS guidance for context:

• Private Letter Ruling 8429039 (1984): The IRS indicated that holding a property for two years would generally be sufficient for investment purposes.

• Revenue Procedure 2008-16: In its safe harbor for rental pool properties, the IRS examined two 12-month periods, again pointing toward a two-year window as a conservative guideline.

These examples suggest that the IRS often views two years as a safe period to demonstrate investment intent for 1031 exchange purposes. However, shorter ownership periods can still qualify, depending on your circumstances.

1031 Exchange Factors the IRS Considers

When evaluating whether a property was held for investment purposes, the IRS looks at:

• Your stated intent at the time of purchase

• Whether you actively rented or used the property for business

• The consistency of your actions with an investment purpose

• The overall facts and circumstances of your ownership

Duration of ownership is just one factor, but it is not the whole story.

Practical Guidance for Investors Considering 1031 Exchanges

If you are considering selling a property after only a year, here is what to keep in mind:

• Document Your Intent: Be prepared to show why you originally purchased the property for investment purposes.

• Explain the Change: If circumstances shifted, like market changes, tenant issues, or a new opportunity, document that as well.

• Consult Early: Talk with your Qualified Intermediary (QI) and tax advisor before listing the property. They can help evaluate your specific facts and circumstances.

There is no IRS penalty for selling after one year, but there is also no guaranteed safe harbor that short. The IRS relies on intent, facts, and circumstances to determine whether your property was truly held for investment.

If you are looking to exchange after only a year of ownership, proceed thoughtfully, document your reasoning, and consult with professionals to ensure you are aligned with IRS expectations.

Trust the Qualified Intermediaries at CPEC1031, LLC

If you are thinking of doing a 1031 exchange or investment real estate, put your trust in the qualified intermediaries at CPEC1031, LLC. We have over two decades of experience working on like-kind exchanges of all types (from forward exchanges, to reverse exchanges). Let us put that experience to work on your next 1031 exchange. Give us a call today at our Twin Cities office, located in downtown Minneapolis and set up a time to discuss how you can defer capital gains taxes with a 1031 exchange.

• 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

The Basic Rules of a 1031 Exchange (And Common Mistakes to Avoid)

You don’t need to know everything about 1031 exchanges before starting one, but it’s important to have an understanding of the basics before jumping into the process. In this article, we are going to lay out the basic rules of a 1031 exchange and discuss some common mistakes to avoid.

Like-Kind Property

In any 1031 exchange, all property involved in the process needs to be “like-kind.” That means you need to exchange US real estate for US real estate.

• Common Mistake: Using Personal Property. Though it was once allowed under section 1031, you can no longer use personal property (such as aircraft, business equipment, etc.) in a 1031 exchange.

Intent Matters

It’s also important to remember that your intent matters a great deal in a 1031 exchange. Throughout the process you need to show to the IRS that you intend to hold your 1031 properties for investment or business use.

• Common Mistake: Trying to Exchange Your Primary Residence. Any property held primarily for personal use (like your primary residence) cannot be used in a 1031 exchange because that property is not held primarily for investment purposes in the eyes of the IRS.

Get Your 1031 Exchange Up and Running Today

Get your 1031 exchange of real estate up and running today by contacting one of the qualified intermediaries at CPEC1031, LLC. Our team of exchange accommodators can help you through each and every step in the 1031 exchange process – from property identification to the closing of your replacement property. With more than twenty years of experience, we have the skills and expertise needed to ensure a smooth transaction. Give us a shout at our Twin Cities office today to learn more about the like-kind exchange process and see if your property qualifies.

• 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Pre-Exchange Refinancing: A Hidden Trap in the 1031 Exchange Process

A common pitfall in 1031 exchanges arises when investors attempt to pull cash out of their properties right before or during a 1031 exchange. The IRS often views these maneuvers as the equivalent of “taking boot.”

• One scenario is pre-exchange cash-out refinancing on the relinquished property:
  If you refinance your relinquished property just before selling it, that refinancing can look like you are receiving proceeds from the exchange. In other words, it may be treated as taxable boot. The IRS has recognized limited exceptions in cases where the refinancing was truly unrelated to the exchange (for example, Fredericks v. Commissioner, T.C. Memo 1994-27 and Garcia v. Commissioner, 80 T.C. 491 (1983), Acq., 1984-1 C.B. 1). But in general, a refinance in anticipation of the exchange, especially right before closing, is highly risky and can undermine your tax deferral.

• Another scenario is borrowing against the replacement property:
  Similarly, loading excessive debt onto your replacement property can create problems. If you borrow more than is needed to close the purchase, you could end up receiving excess cash back at settlement. That cash is treated as boot, and it will be taxable. The safer path is to borrow only what is necessary to acquire the replacement property and avoid creating a cash-out situation.

Refinancing strategies that coincide too closely with your exchange can be seen as disguised cash-outs. Work closely with your qualified intermediary and tax advisor before considering any refinance in connection with a 1031 exchange.

Final Takeaway – Don’t Touch the Money

In a fully taxed-deferred 1031 exchange, you should never touch the money.

Whether you call it “constructive receipt” or “taking boot,” the principle is clear. If you end up with cash in hand, your tax deferral is at risk. Work with a qualified intermediary before closing to make sure the proceeds flow directly into the exchange process.

That one step protects your funds, preserves your tax deferral, and keeps your 1031 exchange on solid legal ground.

Defer Your Tax and Build Your Wealth Over Time with a 1031 Exchange

A 1031 exchange allows you to build your wealth over the long run by deferring your capital gains taxes on the sale of investment real estate. This powerful provision of the tax code is available for all United States taxpayers to use. You do, however, need to meet certain guidelines in order to defer 100% of your capital gains taxes. A qualified intermediary can help you navigate this process and ensure you defer your taxes. Contact CPEC1031, LLC today at our Twin Cities office to learn more!

• 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved