1033 Exchange Benefits
How Section 1033 differs from Section 1031?
Just like Section 1031, Section 1033 of IRC also allows investors to defer capital gains tax and exchanging an investment property for another like-kind property. However, this is the only similarity between both sections. Apart from this, both sections differ significantly from each other, which we’ll discuss here.
As mentioned above, using Section 1033, an investor can differ up to 100% capital gains tax on exchanging an investment property for another like-kind property. Unlike 1031 exchange where an investor willingly relinquishes their property, 1033 exchange investors are forced to relinquish their properties. Yes, that’s true. A 1033 exchange is only possible if the relinquished property was lost, theft or seized by the means of eminent domain. Therefore, once an investor loses their property, they can utilize 1033 exchange and acquire a replacement property of same or greater value.
Eminent Domain – Eminent domain is a power using which a State or Federal government can seize any private property for public use. In return, the government is only liable to pay compensation (which is the current market value of the seized property) to the investor or the property owner.
'Like-Kind' Difference -
Section 1033 is a bit stricter than Section 1031 when it comes to the kind of properties that can be exchanged. Properties involved in 1031 exchanges just need to be similar in nature and needn’t serve the same purpose. On the other hand, 1033 exchange requires both relinquished and replacement properties to serve the same purpose or used in the same way. Therefore, if the lost property was a multi-family apartment, then the replacement property must also be a multi-family apartment.
No stiff deadlines -
Section 1033 has much more flexible deadlines than Section 1031. As you may know, every 1031 exchange investor gets 180 days in total to complete their exchange, where the first 45 days are given to identify the potential replacement property, known as the identification period. However, there is no identification period in 1033 exchanges. Since a 1033 exchange investor loses their property and doesn’t willingly relinquish it, they don’t need to identify a replacement property before acquiring it.
The exchange period is also longer in 1033 exchanges than that in 1031 exchanges. A deadline of 2-3 years is given to 1033 exchange investors for acquiring the replacement property. Three years is given if the lost property was an investment property, whereas, the time limit is two years for all other properties, which begins the earliest of either the day an investor realizes a threat to their property for the first time or when the property is lost. There is an exception though. If an investor loses their property in a presidentially declared disaster, the deadline exceeds by two years and they get 4 years to acquire the replacement property.
No need to hire a Qualified Intermediary
This is another major difference between both sections. As we know, it’s mandatory for 1031 exchange investors to hire a qualified intermediary for their exchange. However, Section 1033 requires no such thing and 1033 exchange investors don’t need to involve a qualified intermediary in their exchange. This gives the investors complete control over their proceeds, which 1031 exchange investors don’t have. However, this also means that 1033 exchange investors need to locate properties by themselves unlike 1031 exchange investors, who have a Qualified Intermediary for locating properties.
Already identified a threat to your property? This is what you should do...
Now that it’s evident that Section 1033 and Section 1031 aren’t alike and differ entirely from each other, we believe you would be able to identify both sections separately. Though 1033 exchanges let investors defer capital gains tax, it’s something you wouldn’t want to be a part of. However, in case you’ve already identified a threat to your property or are on the verge of losing it, you should definitely opt for a 1033 exchange. Prior to that, it’s important that you consult a 1033 exchange expert or advisor. The assistance of an experienced advisor can help you in identifying the challenges that you’ll face in your exchange, plus, they can also resolve all your doubts and guide you through your transaction.