Query regarding how to interpret "Constructive Receipt" for rents received via a 3rd party payment processor

[gm-71003]

My rental property is managed by Innago, Inc for whom Dwolla, Inc is the 3rd party payment processor.

Dwolla sent me a 1099-K for rental income received in 2024. The problem is the gross amount in line

item 1a includes rent for Jan 2025 as well. It appears the tenant sent the rent for Jan 2025 on 12/29/2024

(at least that's what the email from Innago says) and Dwolla presumably received it on 12/29/2024 but

Dwolla / Innago credited the rent to my bank account on 01/02/2025. Now, have I "constructively received"

the Jan Rent on 12/29/2024 or when it was actually credited to my bank account on 01/02/2025? This will

decide whether I need to adjust the 1099-K line 1a gross amount or not.

[DianeW777]

No, you did not constructively receive the income in 2024, you received it in 2025 in your bank account. The IRS does not require you to report income until you actually and constructively receive it. The property management company and your third party payer had constructive receipt of the income in 2024 so their document is technically correct based on when they released the funds to you.  You did not receive it until 2025.

IRS Rule: For federal income tax purposes, the doctrine of constructive receipt is used to determine when a cash-basis taxpayer has received gross income. A taxpayer is subject to tax in the current year if he or she has unfettered control in determining when items of income will or should be paid.

You are required to report only the amount of rent you actually received in 2024. The recordkeeping will be your responsibility and so that part is important for you to know.  Keep notes with your tax file to explain why the 1099-NEC does not match your income. There is no need to add any statement to your tax return.  If the IRS has a question you can address it when and if it is requested.

• Where do I enter income and expenses from a rental property?

[gm-71003]

Thanks for your response. I too initially interpreted, like you did, that the Jan Rent was "constructively received" only on 01/02/2025 when it was actually credited to my bank account. However, the discussion on this thread https://ttlc.intuit.com/community/business-taxes/discussion/1099-nec/00/1907756 threw me off a bit, specifically, the following excerpt from the response:

"...If you authorize someone to be your agent and receive income for you, you are considered to have received it when your agent receives it. "

When interpreting "constructive receipt", the obfuscation is whether Innago LLC (the property manager in this case) or it's 3rd party payment processor Dwolla, can be considered to be my agent receiving the rent on my behalf? Requesting your take on this... thanks! 

[DianeW777 · Accepted solution]

Regardless if you have a property manager or where they send the money, you pay your property manager for their services.  It doesn't change the fact that you did not have 'constructive receipt', access to  use as you wish until 2025.

• IRS PLR-110663-99 - also provides instruction on 'constructive receipt' 
  • Section 1.451-2(a) of the regulations provides that income, which is not actually reduced to a taxpayer's possession is constructively received by the taxpayer in the taxable year during which it is credited to the taxpayer's account set apart for the taxpayer, or otherwise made available so that the taxpayer may draw on it at any time, or so that the taxpayer could have drawn on it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions.
  • IRS Publication 538 - Also explains it as you see in the link provided above.  However, the key phrase is 'Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations.'
• You did not have this type of access to the money, even though it was released/forwarded in 2024.

In the end, you can decide when you report it, however my advice is to include it when you actually had receipt and control which was 2025. 

@gm-71003 

[gm-71003]

Perfect, thanks DianeW777.