Section 1033 of Internal Revenue Code
No, 1031 and 1033 exchanges aren’t the same. Neither it’s a typo. In fact, Section 1033 is an entirely different section. The reason for your confusion can be understood as both sections provide the same benefits, yet they are entirely different from each other. Section 1033 of IRC, like Section 1031, allows investors to defer capital gains taxes on account of property exchange. However, this is the only thing both sections have in common. Apart from this, there is hardly any similarity.
How 1033 Exchanges differ from 1031 Exchanges?
Section 1033 of IRC allows investors to defer capital gains taxes on exchanging like-kind properties. However, unlike a 1031 exchange, where an investor exchanges one property for another, a 1033 exchange is only possible on account of the involuntary conversion of property through eminent domain, condemnation, theft, etc.
Eminent Domain empowers a state or federal government to seize any property located within the territory of the United States of America for public use. The government is only required to bear compensation in return.
The major difference between 1033 and 1031 exchanges is the time limit. In a 1031 exchange, upon closing on the sale of the relinquished property, an investor gets a deadline of 180 days for completing the exchange, where the first 45 days are given to identify the potential replacement property. This time frame of 45 days is known as the ‘identification period’.
On the other hand, in 1033 exchanges, since the investor is forced to relinquish their property, they get a time limit of 2 years for completing the exchange. In case the lost property was an investment property, then the deadline extends to 3 years. Whereas, upon losing the property in a presidentially declared disaster, a time limit of 4 years is given to complete the exchange. In addition, there is no identification period in 1033 exchanges. Therefore, in 1033 exchanges, investors don’t need to bear the burden of identifying a replacement property within a short time of 45 days.
Upon losing the property, an investor receives compensation either from the government or from the insurance company. Thereafter, the investor can reinvest the proceeds in another like-kind property and defer capital gains tax.
Qualified Intermediaries aren’t required in 1033 Exchanges...
Another advantage of section 1033 exchange is that investors aren’t required to appoint Qualified Intermediaries. Yes, that’s true. Unlike 1031 exchanges, where Qualified Intermediaries play a major role, 1033 exchanges don’t require the participation of a Qualified Intermediary at all. As there is no Qualified Intermediary in 1033 exchanges, investors have complete control over the proceeds of the relinquished property. No investor would shy away from such benefits, we can bet.
The only area where Section 1031 appears to be stricter than Section 1031 is when we talk about the nature of properties that can be exchanged. Basically, in 1031 exchanges, exchanged properties need to be like-kind. The term like-kind here refers to properties that are similar to each other. For example, a rental property can be exchanged for any other investment property. However, in 1033 exchanges, the term like-kind refers to properties that are similar in use or services. For example, if the lost property had a shopping complex, then the replacement property needs to be a shopping complex as well.
Keeping all the benefits and drawbacks of Section 1033 exchange in mind, it could be said that no matter how beneficial 1033 exchange multiple properties appear, it isn’t something investors would love to be a part of. After all, who would appreciate things like eminent domain? Probably, nobody, and that’s why 1033 exchanges couldn’t be an alternative to 1031 exchanges, irrespective of the benefits.
However, if you’ve already reached the point where you can sense a threat to your investment property, then you must consult an experienced 1033 exchange expert. This is where we come to your service. We, at www.triplenetproperty.com, can match you with up to three highly qualified 1033 exchange experts and make sure that one out of them stays with you throughout the transaction.
For consultation and assistance regarding 1033 exchange multiple properties, you can call 888-993-2835 or click here to contact one of our advisors to know more about NNN properties. You can also email us at firstname.lastname@example.org.