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What is an Actual or Constructive Receipt in a 1031 Exchange? In order to qualify for tax deferral under IRC § 1031, the taxpayer must meet certain requirements. One of these requirements is that the taxpayer cannot have actual or constructive receipt of the proceeds from the relinquished property sale during the exchange period. See Treas. Reg. §1.1031(k)-1(f)(1).
Likewise, actual or constructive receipt of money or property by an agent of the taxpayer (as determined under general legal principles) will be considered actual or constructive receipt by the taxpayer and the transaction will fail to qualify for tax deferral. See Treas. Reg. §1.1031(k)-1(f)(2).
Actual receipt is an easily understandable concept in that it occurs when the taxpayer actually receives money or the benefit of the money.
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Constructive receipt occurs when the funds are credited to the taxpayer, set apart for them or otherwise made available so that they may draw on those funds at any time or after notice of intention to draw upon the funds. It is not necessary for the taxpayer to have actual receipt of funds to be in constructive receipt of them.
Some examples of constructive receipt are as follows:
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How to avoid constructive receipt:
To prevent actual or constructive receipt, a taxpayer must utilize one of the safe harbors provided for in the Treasury Regulations under §1.1031(k)-1(g) (“Regulations”). One of these safe harbors is the use of a qualified intermediary.
A “qualified intermediary” is a third party who enters into a written exchange agreement with the taxpayer prior to the sale of the relinquished property and thereafter, pursuant to the terms of the agreement, acquires the relinquished property from taxpayer and
transfers it to a buyer and acquires the replacement property and transfers it to the taxpayer. The exchange agreement must expressly limit the taxpayer’s rights to receive, pledge, borrow, or otherwise obtain the benefits of the proceeds except as provided under section (g)(6) of the Regulations.
Therefore, to ensure a successful exchange, it is always important to engage the services of a Qualified Intermediary, such as Old Republic Exchange Company, as early as possible prior to the sale of your investment property to safeguard that your funds are handled properly and that all necessary documentation is in place.
Old Republic Exchange Company is knowledgeable, strictly complies with the 1031 exchange rules, and has had its documents thoroughly vetted to insure against any detrimental constructive receipt of funds by exchanging taxpayers.
Mahalo to Julie Bratton with Old Republic Exchange for the insight on this subject.
If you are looking for investment property here on Hawaii Island with or without the use of an exchange give me a call at 808-345-2108.
Renee H. Kraft Luxury Top performing Hawaii State Broker born and raised on the island of Oahu named one of Hawaii State’s very best Realtors. She brings exceptional service to her clientele. Licensed professional Realtor in Hawaii Real Estate since 1992. She has the experience and tenacity to market effectively, negotiate, and focus with attention to detail every step of the way. Educated 7th – 12th grades at the La Pietra Hawaii School for Girls and the University of Hawaii Manoa campus with a B.A. in Psychology. She strives to continually keep up on the Hawaii economic forecasts and daily market activity. Technology driven Renee understands the importance of keeping her clientele in the loop on current market availablility and knowing the market inventory is 100% key to get her clients what they want. Extraordinary exceptional homes, estates, condominiums, and vacant land are her specialty. Integrity and honesty are just a fraction of what Renee shares with her clients and a very strong work ethic. Putting the client’s needs first utilizing the range of experience and knowledge, combined with a a huge amount of Aloha gives her great satisfaction that she can help her clients make sound and profitable real estate investments. Member Rotary Club of Kona -Accredited Buyers Representative (ABR) -Sellers Representation Specialist (SRS) -Graduate Realtors Instutute (GRI) -Resort and Second Home Property Specialist RSPS).
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