1033 (yes, 1033, not 1031) exchange

2 Replies

I have a couple of properties that are in the middle of a future development and I will have some funds that I will want to do a 1033 exchange with. 

It's not so easy to find out exact details on requirements, as there's no middle man involved and my tax guy has never had one. It's obviously not so common. I will get a letter from the City, stating that it would go into eminent domain, if we hadn't come to an agreement. 

On one hand, I will have a much longer time to identify another/more properties, but I just read that the qualifications for 'like property'' is much narrower than with a 1031. 

Since these are 2 vacant lots that I'm selling, does that mean that I can only buy other vacant lots with the funds? My intentions are to buy another house or 3 and also renovate. Would that qualify? Or does anyone know where I can go to find out? 

Hi @Michaela G.

As you have found, there is very little guidance on 1033 Exchange transactions, and very few legal and tax advisors have any experience with them. 

You are right on track with obtaining the letter.  You would have to prove if you were audited that you were absolutely threatened with an eminent domain action that was beyond your control.  The letter would have to state that the city WILL take your property via eminent domain action if you are unable to reach an agreement with them.  

You do have significantly more time to complete the 1033 Exchange than you do with a 1031 Exchange. 

The definition of like-kind property under a 1033 Exchange is narrower than a 1031 Exchange.  It is much narrower if you are involved in a natural disaster, but not quite as narrow if it is an eminent domain action.  Like-kind under an eminent domain action is more closely related to a 1031 Exchange.  

Unfortunately, there is very little discussion or guidance on this topic.  The technical requirement is that the relinquished property and the replacement properties must be "similar or related in service or use."   We have had many clients over the years lose vacant land through an eminent domain action and have 1033 Exchanged into single-family or multi-family residential property, and most of the tax advisors that we have worked with are comfortable with this as long as it is an eminent domain action and not a natural disaster.  

You can have your tax attorney or accountant search their tax system for cash law that would help support this.  I have not seen any other guidance that I can refer you to.