Do you know the difference between 1031 Exchange and 1033 Exchange? For investor owners, these are important IRS provisions to know.
In a 1031 Exchange, an Investor Owner elects to sell a property and “exchanges” it for a like-kind investment property, at an equal or higher value. The owner cannot take receipt of the proceeds, or it becomes taxed. Instead, it must reside with a qualified intermediary from the close of escrow on property #1, through the close of escrow on property #2. There are timeline restrictions of 45 and 180 days, and there must be three properties identified to purchase.
In a 1033 Exchange, an investor owner has relinquished the property through a “forced conversion’, such as an Eminent Domain action, condemnation, or natural disaster. This 1033 deferment allows the owner to avoid capital gains or depreciation recapture taxes on any gains. These expenses could exceed 20 to 30% of the investors proceeds otherwise. Also, the proceeds do not have to reside with an intermediary. The second property purchased must also be “like-kind” investment property, but the timelines can be two to three years. There are no property identification requirements, and, the investor is not required to re-invest all equity realized out of the forced conversion as long as the total value of the replacement property is equal or greater than the value of the forced conversion.
If you are subject to a “forced conversion”, research the benefits of a 1033 Exchange to determine your best options. Give us a call to help with your next 1031 or 1033 Exchange.
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