Actual receipt refers to the moment when an investor takes physical possession of the proceeds from the sale of a property that is being exchanged in a 1031 exchange. This is significant because, in a 1031 exchange, the investor must reinvest the sale proceeds in a replacement property within a specific time frame in order to defer paying capital gains taxes. If the investor takes actual receipt of the sale proceeds, even for a short period of time, the 1031 exchange will no longer qualify, and the capital gains taxes will become due.
- Actual receipt of sale proceeds from a property being exchanged in a 1031 exchange disqualifies the exchange and triggers capital gains taxes.
- The investor must reinvest the sale proceeds in a replacement property within a specific time frame to defer paying capital gains taxes.
John owns a rental property that he’s been using as an investment for several years. He decides to sell the property for $500,000 and use the proceeds to purchase a replacement property through a 1031 exchange. If John takes actual receipt of the sale proceeds, even for a short period of time, the 1031 exchange will no longer qualify and John will owe capital gains taxes on the sale of the original property.
- It’s important to work with a qualified intermediary (QI) when conducting a 1031 exchange to ensure that the exchange meets IRS requirements and to avoid actual receipt of the sale proceeds.
- Avoid personal use of the sale proceeds or placing the funds in a personal account, as this will trigger actual receipt.
- Make sure to follow the deadlines and requirements set by the IRS for a 1031 exchange to ensure the exchange qualifies.
- Consult with a tax professional to fully understand the requirements and implications of a 1031 exchange.
- Consider the use of a QI to assist with the exchange and ensure compliance with IRS rules.