M id A tlantic Real Estate Journal — Owners, Developers & Managers — October 30 - November 12, 2020 — 9B
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O wners , D evelopers & M anagers
hen taxpayers think about the replace- ment of one invest- By Matthew Young, CPA, Withum Opportunities to Utilize Involuntary Conversions of Real Estate for Natural Disaster Relief W
the investment. Past court cases have expanded on this definition, adding additional language to qualified property including: 1. Reinvestment in “substan- tially similar property,” 2. Reinvestment by a sub- stantial continuation of the prior commitment of capital, an investment in which the character has not changed, and 3. Transactions that allow the taxpayer to return as closely as possible to their original position. An additional consideration taxpayers must remember to
take into account came about with the passing of the Tax Cuts And Jobs Act of 2017. That act eliminated the abil- ity for taxpayers to include personal property for purposes of a like-kind exchange; that definition including both ex - changes under Section 1031 as well as involuntary conver- sions under Section 1033. Defining the Replacement Period For destroyed property, the replacement period begins with the date of destruction. For property lost due to con- demnation or seizure, the
earlier of the below three dates triggers the start of the replacement period: 1. Date on which property was condemned or seized, 2. Date on which property first came under threat of con - demnation or seizure, or 3. Date on which property was sold or exchanged as a direct result of the threat of condemnation or seizure. The end of the replacement period is considered to be two years following the end of the gain realization year for destroyed property, and three years following the end of the
year for condemned or seized property. One additional difference of note for the replacement period is that property located within a federally declared disaster area automatically re- ceives a four year replacement period in lieu of the baseline two year window. To make a 1033 election in the year in which the realized gain is received, taxpayers aren’t required to specifically file anything with the return, How the Election Works in Practice continued on page 16B
ment real es- tate property with another, the conversa- tion gener- ally centers around the popular 1031 e x c h a n g e , the common-
Matthew Young
ly used name for exchanges of property covered within Internal Revenue Code (IRC) section 1031. However, a sec- ond option is available within IRC section 1033, known as an Involuntary Conversion, that is especially valuable to taxpayers who have fallen on unfortunate times. With the recent Internal Revenue Service-designated Disaster Situations, including IA-2020-05, tax relief for Iowa derecho victims, CA-2020-06, tax relief for California wild- fire victims and LA-2020-03, tax relief for Hurricane Laura victims, Section 1033 is a great option for real estate owners with lost or destroyed property to get back on their feet financially by deferring the tax consequences of any relief, whether insurance pro- ceeds or government aid, that is received. Determination of Qualifying Property Unlike a 1031 exchange that results in the sale of appreci- ated property to an outside buyer, a 1033 involuntary con- version arises either as a result of casualty, theft, seizure or condemnation of property and a subsequent realized gain as a result of insurance or condem- nation proceeds received. After the loss of property and the insurance or condem- nation proceeds have been received, taxpayers must de- termine whether the replace- ment property qualifies within the limitations of Section 1033 and qualifies for tax deferral of any calculated gain. There are a variety of types of property that qualify, with the most common being property similar or related in service or use as the property converted. This is a fairly easy threshold to overcome as, more often than not, in the case of an involun- tary conversion of real estate, the proceeds received are used either to replace the prop- erty lost directly or acquire a similar property to continue
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