Avoiding Constructive Receipt in Your 1031 Exchange

One area that catches potential exchangers off guard (and can jeopardize the exchange altogether) is the concept of constructive receipt. While actual receipt is easy to identify – the exchanger directly receives the sale proceeds from the relinquished property, constructive receipt is a little more ambiguous.

In actual receipt, it doesn’t matter what form the funds take – cash or wire transfer into an account. The bottom line is if the exchanger has direct access to the funds at any time, the transaction no longer qualifies as a #1031 exchange.

But constructive receipt is slightly more elusive. Constructive receipt occurs when the exchanger has the right to receive or control funds, even if he or she does not have direct access to the funds. As an example, if an exchanger receives the proceeds in the form of a check, then he or she is deemed to have constructive receipt even if they never cash the check.

The mere act of accepting the check, made payable to the exchanger, cancels the exchange before it really begins. Even if the exchanger plans to immediately endorse the check over to the qualified intermediary.

Because of the concept of constructive receipt, it is critical that any investor planning to conduct a 1031 exchange brings a qualified intermediary on board before the relinquished property is sold. This eliminates the possibility of constructive receipt.

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If a 1031 exchange is in your future, visit our website to learn more about these powerful tax deferral tools and our qualified intermediary and replacement property locator services.