What to Know About 1033 Exchanges and Involuntary Conversions

Section 1033 (a close cousin to 1031) allows you to defer the gain when you lose your property due to an involuntary conversion such as theft, condemnation, conversion, eminent domain takings, etc. The benefits of a 1033 exchange are that you get to defer that gain. In some ways, 1033 is better than 1031 because you have a longer period to reinvest your funds and you don’t need to use an intermediary to hold your funds.

The Downside of 1033

Here’s the downside of 1033. In order to do a 1033 you must have had an involuntary loss. Commonly this arises in the context of a condemnation proceeding started against you or knowledge of a credible threat of condemnation. The problem is that many municipalities are leery of starting an actual condemnation - they don’t want the litigation headaches. Instead they want to negotiate with the seller to come to an voluntary and mutually agreeable price. If you’re negotiating, it’s hard to say that you’re selling under threat of condemnation. So many people who are dealing with government bodies will set the transaction up under 1031 – and if it qualifies for 1031 great. As a backup they can have a 1033 to fall back on.

Get Something in Writing

Mere saber-rattling by the government authority (“well we could condemn if we wanted to…”) probably doesn’t qualify as a credible threat. So I advise people to do the 1031 exchange or get something substantive from the government entity that they will condemn. For example, if you can get them to put a representation and warranty in the purchase agreement that the government authority can and will condemn if this purchase agreement is not accepted then you’ve got something authoritative in writing that you can rely on for your 1033. Absent credible evidence that the governmental agency has the power to take the property and has in fact made an actual imminent threat to take the real property you’re better off structuring as a 1031.

Another consideration for owner-operators (owner-user), that run a business out of their condemned relinquished property is that the like-kind standard under 1033 may require them to purchase a replacement property that is “similar or related in service or use” to their old relinquished property.  This requirement under 1033 that the replacement property be functionally equivalent is a much more exacting standard than the broadly construed like-kind standard for real estate under 1031.  Rev. Rul. 64-237, 1964-2 C.B. 319, states that, with respect to an owner-user, property is not considered similar or related in service or use to the converted property unless the physical characteristics and end uses of the converted and replacement properties are closely similar.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

A Primer on 1033 Exchanges

Section 1031 allows taxpayers to defer their capital gains taxes when voluntarily selling their real property. Section 1033 deals with involuntary sales (for example, condemnations, seizures, or losses caused by theft or destruction). In this article, we’re going to talk about the 1033 exchange and when it can be used to defer real estate taxes.

Section 1033

Section 1033 of the Internal Revenue Code deals with involuntary sale or loss of the property in question. 1033 exchanges allow you to retain your sales proceeds, and you have a much longer time period to complete them (2-3 years). Compare that to a 1031 exchange where you have 180 days total to complete your exchange and you are required to roll your sales proceeds into your replacement property.

1033 exchanges are not as common as 1031 exchanges because of the high benchmarks you need to reach, but they are more favorable to the taxpayer. In general, if you are eligible for a 1033 exchange, you should try to do one. If not, then a 1031 exchange is a great alternative.

Like-Kind Exchange Company in Minneapolis

At CPEC1031, LLC, we focus exclusively on like-kind exchanges of real estate under section 1031 of the Internal Revenue Code. Reach out to our 1031 exchange professionals today to learn more about the exchange process and get your 1031 exchange started. Your qualified intermediary can help you through all the elements of your exchange by answering your questions, making advisements, and preparing your 1031 exchange documents. Our main office is located in downtown Minneapolis but we help clients across the country with their exchanges.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

The Similarities & Differences Between 1031 and 1033 Exchanges

1031 exchanges and 1033 exchanges both allow taxpayers to defer their capital gains taxes when selling property, but there are some notable differences between the two. In this article, we are going to explain the similarities and differences between the 1031 exchange and the 1033 exchange.

1031 Exchange

The 1031 exchange allows you to defer your capital gains tax on the sale of real estate so long as the property involved is used for investment purposes or in your trade or business. A qualified intermediary is required for this type of exchange, and you must complete your exchange within the allotted 180 day time period. All of your net proceeds from the sale of the relinquished property must be reinvested into the new replacement property.

1033 Exchange

1033 exchanges are only applicable when it comes to property that has been involuntarily converted or exchanged. In other words, section 1033 deals with property that has been condemned, destroyed, or stolen. Unlike the 1031 exchange, a 1033 exchange does not require a qualified intermediary. Instead, the taxpayer simply reports the exchange on Form 4797. There are also no time restrictions for identifying replacement property. However, the net proceeds still must be reinvested in a replacement property of equal or greater value.

Minneapolis Qualified Intermediaries

The qualified intermediaries at CPEC1031, LLC have more than two decades worth of experience facilitating 1031 exchanges of real estate. Our intermediaries are well versed in section 1031 of the Internal Revenue Code and can help guide you through the 1031 exchange process. Let us assist you and ensure that your like-kind exchange is flawless. Give us a call today to set up a time to chat with one of our intermediaries about your exchange. You can reach us at our main office in downtown Minneapolis.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

The 1031 / 1033 Exchange Combo

We are working with a client that would like to 1031 exchange out of a property that recently went through the Eminent Domain process for a road-widening project in front of the property. Ideally, they want to combine funds from both transactions into one exchange property. Is this possible?

The property is owned as an LLC. How does that complicate the ability to do individual exchanges? Would they have to convert to a TIC in order to go their separate ways? If so, how long would the process take? 

The short answer is yes. This is possible by doing a 1031 / 1033 exchange combo. However, the “value” of the Replacement Property may need to be high enough to cover both a 1033 and 1031.

1031 Exchange Company

Looking for assistance with your 1031 exchange? You’ve come to the right place! At CPEC1031, our qualified intermediaries have over two decades of experience facilitating transactions under section 1031 of the Internal Revenue Code. We can help you through the entire process and ensure that you are well-prepared for the closing table. Contact us today at our downtown Minneapolis office to learn more!

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved

Can I do a 1031 if my Property is Being Purchased Under Eminent Domain?

Sometimes we have clients call and say that their property is being purchased as part of an eminent domain or involuntary taking and they wonder if a 1031 exchange is an option in this scenario.

Section 1033

There is another code section that maybe applicable in these situations - code section 1033 of the Internal Revenue Code. Under that provision you can have a longer period of time (sometimes two to three years) to redeploy the cash. Furthermore you can actually hold your own proceeds, without needed a qualified intermediary.

When to Use a 1031 Exchange

But 1033 isn't always that simple. Sometimes there are some areas of gray. Perhaps you're voluntarily selling the property to the government agency and it's not really an involuntary taking, it's more of a negotiated voluntary sale that maybe would have resulted in the involuntary taking if the parties hadn’t come to a meeting of the minds.

In those situations where the potential taking never really amounted to an actual legal proceeding and it's more of a voluntary sale on your part - in those situations it's probably better to do a 1031 exchange.

However, if you actually have been served with a condemnation notice, this is a real legal proceeding, and it's not just the threat of condemnation it's an actual taking, in those situations you know you're clearly in the 1033 category.

1031 & 1033 Exchange Professionals

In either instance you can give us a call and we can help you understand the process and give you some pointers on what to do. For example, under 1033 it’s critical that you file an election on the tax return for the first year in which you receive any payments under that eminent domain taking.

• Start Your 1031 Exchange: If you have questions about section 1033, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved