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 Qualified Intermediary (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.
|1033 Exchange||1031 Exchange|
|Involuntary sale||Voluntary sale|
|No requirement for Accommodator / Qualified Intermediary (QI)||Requires Accommodator / Qualified Intermediary (QI)|
|2 to 4 year replacement period||45-day identification and 180-day completion replacement period|
|Not required to replace equal amount of debt to avoid mortgage boot||Requires equal or greater amount of debt to avoid mortgage boot|