1033 exchange

How Is A 1033 Exchange Different From A 1031 Exchange?

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.

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1031Sponsors.com is a web portal owned by Investment.Net, LLC. The company is functioning in the 1031 exchange market for more than 15 years. Neither Investment.Net nor 1031Property intend to act as a broker or sell any goods or services. 1031Sponsors does not offer legal or tax advice. Tax topics discussed are for educational purposes only and should not be considered professional tax advice. It's recommended that you discuss your situation with your tax or legal advisor. Distributing an investment in different assets or choosing alternative investments involves higher risks than traditional investments and shouldn't be taken for granted. All alternative investment strategies are sold along with a prospectus that discloses all risks, fees, and expenses. These investments are not tax-efficient, and an investor should consult with his/her tax advisor before investing. The investor should be prepared to bear loss knowing that financial risks are attached to such investments.

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