Actual Receipt of Exchange Funds

Actual receipt is about who gets the money, not about intent.

Reg. section 1.1031(k)-1(f)(2) applies the general rules of actual and constructive receipt, regardless of your accounting method. You are in actual receipt when you receive the money or property or its economic benefit. Constructive receipt is the companion rule for money credited to you or available on demand.

The agent rule is broad. Actual or constructive receipt by your agent is your receipt, and the regulation determines who is an agent here without regard to the disqualified person definition. That is why proceeds must go to a qualified intermediary under a written exchange agreement rather than to your attorney's or broker's account.

Under paragraph (f)(1), receiving money or other property as part of the consideration makes that part taxable under section 1031(b), and receiving the full consideration before the replacement arrives makes the whole transaction a sale.

Actual receipt covers other property as well as cash. If the buyer hands you a note or any other non-like-kind property as part of the price before your replacement arrives, paragraph (f)(1) treats it the same way as money.

A hypothetical closing shows the difference between a partial and a full receipt.

Hypothetical: you sell a rental for $500,000 with $300,000 of gain. At closing, $40,000 is wired to your personal account and $460,000 goes to your intermediary, which later buys a $460,000 replacement. The $40,000 is boot and is taxable, because you received it before your replacement property; the rest of the exchange can still qualify.

Now suppose the buyer's lender mistakenly wires the full $500,000 to you. You are in actual receipt of the full consideration before receiving replacement property, which paragraph (f)(1) treats as a sale. The regulation contains no exception for a mistaken wire, so the closing instructions deserve a second check. Review your own facts with your CPA.

The page on what happens when the buyer wires proceeds to the title company instead of the intermediary covers the closing-desk side of this risk.

Some items you receive at closing are disregarded.

Reg. section 1.1031(k)-1(g)(7) says certain items do not knock out the safe harbors: items not included in the amount realized, such as prorated rents, and transactional items that appear on a typical closing statement as a buyer or seller cost, such as commissions, prorated taxes, recording or transfer taxes and title company fees.

Those items do not make you lose the safe harbor, but they can still have tax consequences of their own; see security deposits, rent prorations and boot. The safe-harbor accounts that keep funds out of your hands are described under qualified escrow account and qualified trust.

If you identify nothing by day 45, paragraph (g)(6)(ii) lets the agreement release the money after the identification period. At that point no exchange is left to protect and the sale is taxable; see getting money back when nothing is identified.