Real estate investors should have an alternative for every investment they initiate. Sometimes, these alternatives fetch more profit than primary investment plans. Where investors should pay attention to is the investment plan, which they’re considering an alternative to the primary one, is actually an alternative. It’s quite normal to get confused among two similar investment plans. After all, real estate investment isn’t that simple. One such investment plan that often confuses investors is a 1033 exchange. Many investors consider a 1033 exchange as an alternative to a 1031 exchange. However, it isn’t so. Though 1033 and 1031 exchanges offer the same benefits, in the end, they differ from each other significantly.
When can investors use Section 1033 Exchanges?
Same as a 1031 exchange, a 1033 exchange allows investors to defer capital gains taxes on exchanging ‘like-kind’ properties. However, in a 1033 exchange, an investor not actually exchanges properties willingly. A 1033 exchange is only valid when an investor involuntarily converts their property into cash or loses it in a disaster. ‘Involuntarily conversion’ can result due to any of the following reasons:
- Eminent Domain – Eminent domain is a strategy or power, using which a state or federal government can seize any private property for public use. In return, the government must pay the current fair market value of the seized property to the property owner.
- Natural Disaster – In case an investor accidentally loses their property in a disaster, they can defer capital gains taxes upon exchanging it for another ‘like-kind’ property. The compensation received on the lost property is used for purchasing replacement property.
- Condemnation – Sometimes, properties can be transferred as a result of condemnation. In such cases, a property owner can buy another ‘like-kind’ property without recognizing any capital gains taxes.
Though a 1033 exchange allows tax deferment on exchanging like-kind properties, it’s not something you would like to consider as an alternative to a 1031 exchange. After all, selling and losing property are two different things. However, in case you are in a situation to do a 1033 exchange, there are a few things you must know before initiating the investment.
Want freedom from day-to-day responsibilities? Invest in NNN properties.
If you are fed-up managing your investment property, it’s time to get rid of the burden. By investing in net leased properties, you can say goodbye to management responsibilities. A Triple Net Lease or NNN lease is a single-tenant arrangement that requires the tenant to pay all major operating expenses associated with the leased property. No investor or landlord wants to get into the mess of paying and keeping a record of utility bills, and you might also be feeling the same. Therefore, by investing in a NNN property, you can buy yourself freedom from property management.