{"id":27285,"date":"2020-01-01T16:35:37","date_gmt":"2020-01-01T21:35:37","guid":{"rendered":"https:\/\/www.affiliated1031.com\/section-1031-exchange-vs-section-1033-conversion\/"},"modified":"2020-01-01T16:35:37","modified_gmt":"2020-01-01T21:35:37","slug":"section-1031-exchange-vs-section-1033-conversion","status":"publish","type":"post","link":"https:\/\/www.affiliated1031.com\/es\/section-1031-exchange-vs-section-1033-conversion\/","title":{"rendered":"Section 1031 Exchange vs. Section 1033 Conversion"},"content":{"rendered":"<div  class=\"tatsu-h6utjcslh0g9884m tatsu-section  tatsu-bg-overlay   tatsu-clearfix\" data-title=\"\"  data-headerscheme=\"background--dark\"><div class='tatsu-section-pad clearfix' data-padding='{\"d\":\"15px 0px 15px 0px\"}' data-padding-top='15px'><div class=\"tatsu-row-wrap  tatsu-wrap tatsu-row-one-col tatsu-row-has-one-cols tatsu-medium-gutter tatsu-reg-cols  tatsu-clearfix tatsu-h6utjcsljddovrbh\" ><div  class=\"tatsu-row \" ><div  class=\"tatsu-column  tatsu-bg-overlay tatsu-one-col tatsu-column-image-none tatsu-column-effect-none  tatsu-h6utjcslkr1mid70\"  data-parallax-speed=\"0\" style=\"\"><div class=\"tatsu-column-inner \" ><div class=\"tatsu-column-pad-wrap\"><div class=\"tatsu-column-pad\" ><div  class=\"tatsu-module tatsu-text-block-wrap tatsu-h6utjcslm0859p99  \"><div class=\"tatsu-text-inner tatsu-align-center  clearfix\" ><style>.tatsu-h6utjcslm0859p99.tatsu-text-block-wrap .tatsu-text-inner{width: 100%;text-align: left;}<\/style>\n<p>So far this year, our office has had four clients who have had their property taken by a governmental agency through eminent domain proceedings.\u00a0 So, let\u2019s briefly discuss some of the questions they should have asked and the information their financial and\/or legal advisors hopefully gave them.<\/p>\n<h3>What options are available to me as the Taxpayer, when my investment real estate is involuntarily converted (taken from me)?<\/h3>\n<p><strong>Answer:<\/strong>\u00a0 The Taxpayer has two major options.<\/p>\n<ol>\n<li>Use Section 1031 and transact a Tax Deferred Exchange.<\/li>\n<li>Use Section 1033 for tax deferral purposes.<\/li>\n<\/ol>\n<h3>What are the basic rules for a Section 1031 exchange?<\/h3>\n<p><strong>Answer:<\/strong>\u00a0There are 6 basic Rules on a <a href=\"https:\/\/www.irs.gov\/pub\/irs-news\/fs-08-18.pdf\" target=\"_blank\" rel=\"noopener\">Section 1031 Exchange<\/a>:<\/p>\n<ol>\n<li><strong>Both<\/strong> the property sold and the replacement property (the new property) must be <strong>held for use in a trade or business or have been held for investment purposes.<\/strong> IMPORTANT NOTE: the replacement property can be any t<strong>ype of investment real estate<\/strong>.\u00a0 So, you could sell a condominium unit and replace it with a piece of raw land, as long as they were both investment properties or used in a trade or business.<\/li>\n<li><strong>The <a href=\"https:\/\/liberty1031.com\/what-is-a-1031-exchange\/1031-exchange-timelines\/\" target=\"_blank\" rel=\"noopener\">45-day Rule for identification<\/a> of a replacement property.<\/strong>\u00a0The Taxpayer has up to 45 days from the day of closing to identify\u00a0the property the Taxpayer may want to purchase.<\/li>\n<li><strong>The 180-day Rule for the purchase of a replacement property.<\/strong>\u00a0The Taxpayer has up to 180 days from the closing to <strong>close and purchase<\/strong> the replacement property.<\/li>\n<li><strong>The taxpayer may not touch the funds from the sale of the relinquished property<\/strong>. As a result, the funds from the closing are given to an independent third party to handle the exchange portion of the transaction.\u00a0 That independent third party is called a <strong>Qualified Intermediary<\/strong>.\u00a0 Liberty 1031, LLC is a Qualified Intermediary.\u00a0 Liberty 1031, LLC is also responsible for preparing all of the 1031 documentation.<\/li>\n<li><a href=\"https:\/\/liberty1031.com\/1031-exchange-glossary\/\" target=\"_blank\" rel=\"noopener\"><strong>The Same Taxpayer Rule.<\/strong><\/a>\u00a0 The Taxpayer of the relinquished property must be the purchaser of the replacement property.\u00a0 There are some <strong>possible variations<\/strong> to this rule.\u00a0 Be sure to discuss this item with your Qualified Intermediary and your Legal and\/or Financial Advisor.<\/li>\n<li><strong>Replacement Property Rule<\/strong>. In order to defer paying any taxes (Long Term Capital Gains, Depreciation Recapture Tax, and Possible State Taxes), the Taxpayer must purchase investment replacement property of <strong>equal value or more<\/strong> than the property that was relinquished (sold) and <strong>must reinvest all of the cash proceeds<\/strong> into the new replacement property.<\/li>\n<\/ol>\n<h3>What are the basic rules for a <a href=\"https:\/\/www.ecfr.gov\/current\/title-26\/chapter-I\/subchapter-A\/part-1\/subject-group-ECFRbf83dcc4bd89326\/section-1.1033(a)-1\" target=\"_blank\" rel=\"noopener\">Section 1033 transaction<\/a>?<\/h3>\n<p><strong>Answer:<\/strong> There are 4\u00a0 basic Rules on a Section 1033 taking:<\/p>\n<ol>\n<li>There is <strong>no requirement to hire a Qualified Intermediary.<\/strong><\/li>\n<li>The <strong>property is involuntarily converted when one of the following events occurs:<\/strong>the property is destroyed by <strong>fire, earthquake, hurricane or some other destructive event,<\/strong> or the property is <strong>seized without governmental compensation<\/strong> (which makes this type of conversion somewhat irrelevant),\u00a0 or a governmental agency exercises its power of <strong>eminent domain<\/strong> or there appears to be an <strong>imminent threat of a requisition or condemnation<\/strong> (the property owner must be aware of the threat and must reasonably believe that condemnation is likely to happen).<\/li>\n<li><strong>There is a partial conversion<\/strong>\u2014occurs when a portion of the property is involuntarily converted. Note &#8211; If the taking of the real estate portion taken renders the operation of the business or use of the property economically impractical, then the Taxpayer could sell the whole property and defer taxes on the entire property when obtaining a replacement property.<\/li>\n<li><strong>Timelines<\/strong> for a property held for productive use in a business or trade or for investment purposes. The Taxpayer has up to <strong>3 years<\/strong> from the date the converted property was disposed of or the date of a threat or imminence of requisition or condemnation.<\/li>\n<\/ol>\n<h3>\u00a0So which section should a Taxpayer use, 1031 or 1033?<\/h3>\n<p><strong>Answer<\/strong>: A number of knowledgeable CPA\u2019s have advised their clients to use <strong>BOTH<\/strong> sections.\u00a0 By using both Section 1031 and Section 1033, the Taxpayer would first use Section 1031, where the funds would be distributed to the Qualified Intermediary.\u00a0 The Taxpayer will then have 45 days from the closing of its relinquished property, to identify their possible replacement property(ies).\u00a0 The taxpayer also would have 180 days from the closing of the relinquished property to purchase a replacement property.<\/p>\n<p>The advantage of\u00a0doing a Section 1031 tax-deferred exchange for the Taxpayer is that the replacement property can be <strong>any type\u00a0<\/strong>of investment real estate.<\/p>\n<p>For example, a commercial piece of real estate can be exchanged for investment raw land.\u00a0 Should the Taxpayer fail to complete its 1031 exchange, then the escrowed funds would be distributed back to the Taxpayer.\u00a0 The Taxpayer could then continue with a Section 1033 Tax deferral to find and close on another property.<\/p>\n<p>BUT, under Section 1033, the <strong>replacement property must be very similar to or related in service or use, to the property that was taken,<\/strong> in order to have no gain recognized and not taxed.<\/p>\n<p>One final comment:\u00a0 It is ALWAYS advisable that the Taxpayer speaks with their Legal and Financial counsel whenever dealing with an involuntary conversion.<\/p>\n<p>I personally look forward to working with you on your next Section 1031 exchange. \u00a0To answer any of your questions or to open a Section 1031 transaction, please contact Stephen A. Wayner, Esq. CES at our toll-free telephone number: 866-903-1031 or at <a href=\"mailto:swayner@liberty1031.com\">swayner@liberty1031.com<\/a>.<\/p>\n<\/div><\/div><\/div><\/div><div class = \"tatsu-column-bg-image-wrap\"><div class = \"tatsu-column-bg-image tatsu-bg-lazyload\" data-src = \"\"><\/div><\/div><div class=\"tatsu-overlay tatsu-column-overlay tatsu-animate-none\" ><\/div><\/div><style>.tatsu-row > .tatsu-h6utjcslkr1mid70.tatsu-column{width: 100%;}.tatsu-h6utjcslkr1mid70.tatsu-column > .tatsu-column-inner > .tatsu-column-overlay{mix-blend-mode: normal;}.tatsu-h6utjcslkr1mid70 > .tatsu-column-inner > .tatsu-top-divider{z-index: 9999;}.tatsu-h6utjcslkr1mid70 > .tatsu-column-inner > .tatsu-bottom-divider{z-index: 9999;}.tatsu-h6utjcslkr1mid70 > .tatsu-column-inner > .tatsu-left-divider{z-index: 9999;}.tatsu-h6utjcslkr1mid70 > .tatsu-column-inner > .tatsu-right-divider{z-index: 9999;}<\/style><\/div><\/div><\/div><\/div><div class=\"tatsu-section-background-wrap\"><div class = \"tatsu-section-background tatsu-bg-lazyload\" data-src = \"\"><\/div><\/div><div class=\"tatsu-overlay tatsu-section-overlay\"><\/div><style>.tatsu-h6utjcslh0g9884m .tatsu-section-pad{padding: 15px 0px 15px 0px;}.tatsu-h6utjcslh0g9884m > .tatsu-bottom-divider{z-index: 9999;}.tatsu-h6utjcslh0g9884m > .tatsu-top-divider{z-index: 9999;}.tatsu-h6utjcslh0g9884m .tatsu-section-overlay{mix-blend-mode: normal;}<\/style><\/div>\n","protected":false},"excerpt":{"rendered":"<p>So far this year, our office has had four clients who have had their property taken by a governmental agency through eminent domain proceedings.\u00a0 So, let\u2019s briefly discuss some of the questions they should have asked and the information their financial and\/or legal advisors hopefully gave them.<\/p>\n<div><a href=\"https:\/\/www.affiliated1031.com\/es\/section-1031-exchange-vs-section-1033-conversion\/\" class=\"exp-read-more exp-read-more-underlined\">Read More<\/a><\/div>\n","protected":false},"author":1,"featured_media":26981,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_coblocks_attr":"","_coblocks_dimensions":"","_coblocks_responsive_height":"","_coblocks_accordion_ie_support":"","footnotes":""},"categories":[57],"tags":[],"class_list":["post-27285","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-1031-exchange-basics-es"],"_links":{"self":[{"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/posts\/27285","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/comments?post=27285"}],"version-history":[{"count":0,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/posts\/27285\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/media\/26981"}],"wp:attachment":[{"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/media?parent=27285"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/categories?post=27285"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/tags?post=27285"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}