What is a 1033 Exchange?

Section 1033 of the IRS tax code can provide assistance to a taxpayer if they lose their property through “involuntary conversion.” An involuntary conversion occurs when property is destroyed, stolen, condemned, or disposed of under threat of condemnation and the taxpayer receives other property or money in payment.

In many cases, this situation is a result of a government’s power of “eminent domain.” Eminent domain gives states, counties, cities, and other government entities the power to take private property for public use, usually with compensation paid to the owner. If a taxpayer’s property has a gain resulting from the involuntary conversion, he or she may utilize a 1033 exchange to defer the taxes.

The Replacement Period:

	Regarding condemnation of real property “held for investment or in a trade or business,” Section 1033 gives a taxpayer a period of 3 years to roll over the proceeds into a another property that is “like-kind.” The same rules that qualify property to be “like-kind” in a 1031 exchange apply to a 1033 exchange, therefore a Tenant-In-Common (TIC) or Delaware Statutory Trust (DST) investment can qualify as suitable replacement property.

	With respect to real property converted as a result of casualty or destruction, personal use property such as your residence and dealer property, the tax payer has 2 years to roll over proceeds and the replacement property must be “similar or related in services or use.” Essentially, this means the property is functionally similar to and has same uses as the property being converted.

1031 vs. 1033:

The tax deferral provisions of Section 1033 do have some differences with respect to the rules and restrictions involved in a 1031 exchange. For example, a 1033 exchange does not require the use of a Qualified Intermediary. As a result, there are no concerns about the tax payer’s constructive receipt of funds as long as he/she reinvests the funds within 2 to 3 years. Facts and circumstances can very from property to property so it’s important for a taxpayer to consult with their tax professional.

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