Is 1031 Exchange Same As 1033 Exchange?
by Angilina Taylor 1031 Exchange Expert, Tax ConsultantThough
both 1031 and 1033 exchanges let investors defer capital gains taxes, both
sections are entirely different from each other.
Real
estate investors often fail to differentiate between 1031 and 1033 exchanges.
They assume both sections to be similar. However, that's not true. Apart from
the benefit of tax-deferment, there is no other similarity between 1031 and
1033 exchanges.
Section
1031 of IRC -
Section
1031 of IRC, commonly known as a 1031 exchange, lets investors exchange an
investment property for another while deferring capital gains taxes. To qualify
for a 1031 exchange, both relinquished and replacement properties must be
like-kind. Properties involved in a 1031 exchange must be held for use in
trade, business, or for investment purposes. A 1031 exchange can be done over
and over again without any restriction.
1033
Exchange Explained
A 1033
exchange lets investors defer capital gains taxes on exchanging like-kind
properties. However, unlike a 1031 exchange, where a property owner willingly
exchanges one property for another, a 1033 exchange can only be performed on
account of involuntary conversions, such as an eminent domain, condemnation,
theft, etc.
Eminent
domain is the power using which a state or federal government can seize any
private property from an investor for public use. In return, the investor gets
the compensation or the current market value of the seized
property.
Difference
In Deadlines -
The
major difference between 1031 and 1033 exchanges is the time limit. As you may
know, upon closing on the sale of the relinquished property, a 1031 investor
has 180 days to complete the exchange. The investor must identify the potential
replacement property within 45 days.
However,
in 1033 exchanges, since properties are seized from investors, they get a time
limit of 2-4 years for completing the exchange. On account of losing commercial
properties, the deadline will extend to 3 years. However, if an investor loses
their property in a presidentially declared disaster, they get 4 years to
complete the exchange. There is no identification period in 1033 exchanges. So,
investors don’t need to bear the burden of identifying a replacement property
within a short time of 45 days.
Nature
of Properties -
Another
major difference between both sections is the kind of properties that can be
exchanged. In a 1031 exchange, both
relinquished and replacement properties need to be like-kind. For example, a
multi-family unit can be exchanged for an industrial property or any other
investment property. However, in 1033 exchanges, both relinquished and
replacement properties must be similar in use or services. For example, a
multi-family unit can only be exchanged for another multi-family unit and not
for any other investment property.
How
To-Do A 1031 Exchange?
To
qualify for a 1031 exchange, both relinquished and replacement properties must
be held for use in trade, business, or for investment purposes. Personal
properties don't qualify for a 1031 exchange. So, you may not be able to trade
your primary residence for a rental property using this unique tax-deferred
exchange.
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Created on Oct 11th 2019 07:01. Viewed 535 times.