Taxpayers that have experienced a forced loss of property may be able to take advantage of an opportunity to defer capital gains taxes through the exercise of a 1033 exchange.
A 1033 exchange allows property owners to avoid tax liability on capital gains occurring as a result of the forced loss of property, or an involuntary conversion. If the property owner reinvests the proceeds from the involuntary conversion into like-kind property, the IRS permits tax deferral. “Like-kind property” is defined as property that is “similar or related in service or use,” similar to the definition in the more commonly used 1031 exchange, but applied more strictly. Unlike a 1031 exchange, the 45-day identification period does not apply to a 1033 exchange. Generally, the time frame for acquiring replacement property is two years, but in certain circumstances, like condemnation, the time frame is extended to three years. The total value of the replacement property must be equal to or greater than the proceeds gained from the involuntary conversion. “Involuntary conversion” means a loss of property by casualty, destruction, theft, or eminent domain, meaning that the government has seized the property. All of these instances constitute a forced sale, allowing the owner to defer tax liability on the sale revenue.
Ultimately, a 1033 exchange is simpler than a 1031 exchange and may result in significant tax savings. While no gain or loss is required to be reported for the year of the conversion or loss, an accountant can ensure that the details relevant to a 1033 exchange are reported in the year which the conversion or loss occurred. Additionally, a qualified tax professional can assist you with electing a 1033 deferral by filing a refund claim if you have already filed your annual taxes and reported a gain from a forced loss of property. We suggest you consider this option if it is applicable to you and consult a tax professional with any questions you may have.
Katherine Merck is an Attorney with Budd-Falen Law Offices, LLC with a primary focus on property rights, environmental, and natural resources law. Budd-Falen Law Offices, LLC, has attorneys licensed to practice law in Colorado, Idaho, Illinois, Montana, Nebraska, New Mexico, North Dakota, South Dakota, and Wyoming. This article should not be understood to state or imply that any lawyers of this law firm are certified as specialists in a particular field of law. Colorado does not certify lawyers as specialists in any field. The Wyoming State Bar does not certify any lawyer as a specialist or expert. Anyone considering a lawyer should independently investigate the lawyer’s credentials and ability, and not rely upon advertisements or self-proclaimed expertise. This article is informational and is not legal advice. Use of this article or contact with this law firm does not create an attorney-client relationship.