Are you aware of Section 1033 Exchange?

Section 1033 of IRC (1033 Exchange)

Section 1033 Exchange of IRC is also like section 1031, and this allows the investor to defer capital gain tax on exchanging an investment property for another like-kind property. The only common thing Section 1033 and 1031 have in common is the deferring of taxes. Unlike Section 1031, where an investor willingly relinquishes their property and buys another one, Section 1033 is only possible in case of an involuntary conversation of property. Involuntary communication may include loss or annexation of property through eminent or condemnation domain.

Eminent Domain: It is a power that allows the state or Federal government to seize any private property for public use in return, of which the government only pays compensation to the property owner.

Flexible Deadlines -

When it comes to the deadlines, section 1033 Exchange is much compromising than section 1031. As you may know, every 1031 exchange investor has a total of 180 days to complete the entire exchange, where the first 45 days are for the identification of the potential replacement property. This time-period of 45 days is known as the Identification Period. On the other side, 1033 exchange has no identification period. In a 1033 exchange, the investor is compelled to relinquish their property, and the investor does not need to identify the potential replacement property and can directly acquire it.

The exchange period in 1033 exchange stretches out from two to three years. The time limit of three years is given to acquire the replacement property if the lost property was an investment property, which starts the day the investor identifies a risk on their property for the first time. Whereas, a period of two years is given for all other kinds of properties. There is an exception though, if anyone loses their property in a presidentially announced disaster, they will get four years to finish the exchange.

'Like-kind' has a different meaning in Section 1033 -

As now, you are familiar with the point that both Section 1033 and Section 1031 require the replacement property to be like-kind to the relinquished property. However, there is a difference. In Section 1031, the term like-kind is used for the properties that are similar in nature and may not be used to serve the same purpose. For Example, industrial or retail property can be exchanged for an investment property or any multi-family apartment under Section 1031. Whereas, Section 1031 also requires relinquished as well as replacement properties to serve the same purpose or used in the same way. In other words, Section 1033 exchange, you can only exchange a retail property for another retail property and not for any other investment property.

No Qualified Intermediaries are required for 1033 Exchange -

Another significant difference between Section 1033 and 1031 is that Section 1033 does not require investors to employ a Qualified Intermediary. Unlike Section 1031, it's not necessary to involve a Qualified Intermediary in 1033 exchange. As there is no Qualified Intermediary involved in 1033 exchanges, 1033 exchange investors have full control over the proceeds received from the sale. However, this means that 1033 investors need to find properties alone, unlike 1031 exchange investors, who have Qualified Intermediaries involved to find properties.

Lisa taylor is an acclaimed financial writer and blogger experience in writing blogs on finance. To helps customers defer taxes and make better investment decisions.