IRC Section 1033 is a section of the tax code which provides certain taxpayers a similar tax-deferral as real estate investor under Section 1031, but specifically for properties which are considered to have been part of an “involuntary conversion”.
1033 Exchanges in Detail
Involuntary conversions are most often the result of a partial or complete property destruction (typically covered by an insurance payout), a condemnation, or a seizure of the property via eminent domain. Under the U.S. Constitution, the condemning governmental agency is required to compensate the property owner for any loss they suffer due to a governmental seizure of their property.
Under Section 1033, a taxpayer who incurs an involuntary conversion can postpone their recognition of the gain realized from the conversion (an exception to the two-year holding period) by following the outlined rules to find and acquire a replacement property (or properties).
One of the major differences between Section 1033 Exchanges and Section 1031 Exchanges is the allowable timeline for acquiring a replacement property. Section 1031 only allows taxpayers 45 days to identify and 180 to close from the date of sale of their relinquished property, whereas Section 1033 can allow a taxpayer between 2-3 years to close on a replacement property depending on the exact cause of the involuntary conversion. Another important difference between Section 1033 and Section 1031 exchanges is that the 1033 exchange does not require the use of a Qualified Intermediary (QI). A taxpayer can take receipt the proceeds from the involuntary conversion, whether that comes from an insurance settlement, compensation as part of a seizure through eminent domain, or other source, and hold the funds until they are needed for the acquisition of the replacement property.
Our network of real estate investment professionals work with cash-flowing, management-free investment property options which many investors choose to use in completing their Section 1033 exchange. Let us show you how to reduce or eliminate dealing with any day-to-day management burdens by investing your 1033 exchange proceeds into professionally managed or net-leased properties (NNN).