What Are They Anyway? 

A 1033 Exchange is similar to a 1031 Exchange in many regards, but it’s only able to be performed under specific circumstances. Investors can qualify for a 1033 if they are forced to exchange their property due to eminent domain, natural disasters and other destruction, or theft.

Similar to a 1031, a 1033 requires reinvestment into a “like-kind” replacement property, however there is much more flexibility around where else the money can be reinvested and when. Some of the potential benefits of a 1033 Exchange include:

The extended timeline can be both a blessing and a curse. If you wait too long to find your replacement property, there might not be anything suitable for your needs.

Under section 1033, a replacement property qualifies if it is “similar or related in service.” You also have the option to select 80% control of a corporation that owns replacement property.

What is an "involuntary conversion"?

Under Section 1033, an involuntary conversion is defined as a destruction or loss of the property through casualty, theft or condemnation action pursuant to government powers of eminent domain, and the resulting compensation from such destruction or condemnation.

What does "similar or related in service or use" mean?

For Section 1033, the restriction means that the end use of the new property must be similar to the end use of the old property. For example, if you lose real estate property you could not replace that property with a parking lot and qualify for non-recognition under Section 1033.

Do I need a qualified intermediary for a 1033 Exchange? 

No, a qualified intermediary isn’t needed for the purposes of a 1033 exchange. Instead, the compensation for the lost property can remain in your possession until you purchase a replacement property of equal to or greater value than the compensating proceeds.

What is the holding period for a 1033 Exchange? 

In most cases, the replacement period is two years. If the lost property was for productive use in a business, trade, or for investment, like a rental property or office building, the replacement period is extended to three years.

I lost my home in a natural disaster. Does Section 1033 apply? 

Yes. For property destroyed or lost in a Presidentially declared disaster, Section 1033 provides that any proceeds received for the residence or its contents are treated as a single item of property, and any replacement property similar or related in service or use will qualify as replacement property for the purposes of Section 1033.

What requirements do I need to meet to defer my tax liability on the involuntary conversion of property under Section 1033?

If it’s clear you lost your property to a qualified “involuntary conversion”, then there are two other qualifications for a 1033: replacement property must be purchased within the applicable timeframe and the replacement must be a like-kind property.