What is a Section 1033 exchange?

Section 1033 of the Code covers “involuntary conversions,” including natural disasters and losses via eminent domain. Property owners may not realize that funds received as a result of these actions – condemnation award proceeds or insurance proceeds – would normally trigger recognition of gain. Section 1033 of the code, similar to Section 1031, allows taxpayers to defer that recognition of gain.

While similar to a Section 1031 exchange, Section 1033 has some notable differences:

There is no concern about the taxpayer’s “constructive receipt of funds;” therefore there is no need for a qualified intermediary.

Taxpayers have a longer period of time to identify replacement property and reinvest proceeds – generally up to two years, and even up to three years or longer in certain circumstances, such as involuntary conversions arising from certain federally declared disasters.