Constructive Receipt is a concept in tax law that refers to the treatment of income as received, even if it has not actually been received. In a 1031 exchange, constructive receipt refers to the possibility of an investor being taxed on the proceeds from the sale of their original property if the funds are made available to them before they are used to purchase the replacement property.
Key-Takeaway
- Constructive Receipt refers to the treatment of income as received, even if it has not actually been received.
- In a 1031 exchange, constructive receipt can result in the investor being taxed on the proceeds from the sale of the original property if the funds are made available to them before they are used to purchase the replacement property.
- Constructive receipt can be avoided by properly structuring the 1031 exchange.
Example
An investor sells a property for $500,000 and wants to use the proceeds in a 1031 exchange to purchase a replacement property. If the investor receives the $500,000 and has control over the funds before they are used to purchase the replacement property, they may be considered to have constructively received the funds and be subject to capital gains taxes.
Recommendations
- Consult a tax professional or financial advisor to ensure that the 1031 exchange is structured to avoid constructive receipt.
- Avoid having control over the proceeds from the sale of the original property before they are used to purchase the replacement property.
- Follow all IRS guidelines and procedures to ensure the proper treatment of the funds in the 1031 exchange.
