There are three basic steps in a typical 1031 Exchange
- EXCHANGER SELLS PROPERTY and proceeds are escrowed with a Qualified Intermediary (“QI”)
- QUALIFIED INTERMEDIARY TRANSFERS FUNDS for purchase of replacement property
- INTERMEDIARY COMPLETES EXCHANGE by acquiring replacement property or properties
- 45 Day Identification Period: The taxpayer must identify potential replacement property or properties within 45 days from the date of sale.
- 180 Day Exchange Period: The taxpayer must acquire the replacement property within 180 days.
* Closing on the replacement property must be the earlier of either 180 calendar days after closing on the sale of the relinquished property or the due date for filing the tax return for the year in which the relinquished property was sold; unless an automatic filing-extension has been obtained.
What is a 1033 Exchange?
Section 1033 Exchanges
Internal Revenue Code Section 1033 governs the tax consequences when a property is compulsorily or involuntarily converted in whole or in part into cash or other property. This is commonly referred to as an “involuntary conversion” since the loss of property is beyond the control of the taxpayer and realize gain because the insurance or condemnation proceeds exceed the owner’s tax basis in the property. Section 1033 does not require a QI. In a Section 1033 Exchange, the taxpayer can receive the sales proceeds and hold them until the replacement property is purchased. If not all the proceeds are used towards acquiring the replacement property, the taxpayer is taxed on the difference. In addition, replacement property cannot be acquired from a related party.
Events that May Qualify for 1033 Exchange
- Casualty
- Condemnation
- Destruction
- Earthquake
- Eminent domain
- Fire
- Hurricane
- Seizure
- Theft
| KEY COMPARISON of 1033 vs 1031 Exchange | |
| 1033 Exchange | 1031 Exchange |
| Involuntary Sale | Voluntary Sale |
| No requirement for Accommodator /QI | Requires Accommodator /QI |
| 2 to 4 year replacement period | 45-day identification and 180-day completion replacement period |
| Additional debt can offset equity | Additional debt cannot offset equity |