Q. What is a 1033 Exchange?
A. Finding information about a 1033 exchange can be tricky. A search of the IRS site brings up the following as the first result:
“This notice provides guidance regarding an extension of the replacement period under § 1033(e) of the Internal Revenue Code for livestock sold on account of drought in specified counties.”
If you sold your chickens and/or goats and are looking for a way to defer the gain on that income, please see http://www.irs.gov/irb/2012-42_IRB/ar11.html. If, however, you are interested in deferring gain on a property sale, keep reading.
A 1033 Exchange is referred to as one of the common nontaxable exchanges, along with sections 1031 and 1032. What is special about section 1033 is that it deals with involuntary conversions. Specifically the code says:
“If property (as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, no gain shall be recognized.”
So, essentially, should a flood, tornado, meteor or zombie invasion destroy your property; or the government need your space for a new freeway; you may find and purchase a similar property, within three years, and defer the taxable gain on any income from the converted property. Please check with your tax advisor regarding a zombie invasion.
Q. What if your involuntarily converted property is not in the United State?
A.The IRS defines similar property as located in the United States, so the 1033 exchange would not be relevant in that scenario. However, there have been some cases in which the property converted was in a US territory. Specifically, Private Letter Ruling 9038030-dated 6/25/1990 did provide permission for a taxpayer in a similar circumstance to claim the like kind exchange for a property in the United States and a property in the Virgin Islands. See below for an excerpt.
“Thus, if the individual involved in the exchange is a citizen or resident of the United States and has income derived from sources within the Virgin Islands, or effectively connected with the conduct if a trade or business within such possession, for the taxable year (of the exchange), then section 932 of the code applies to that individual and the term “United States” is enlarged to encompass the US Virgin Islands. Thus, property located in the States or in the District of Columbia and property located in the US Virgin Islands shall be considered as property of like kind for that particular individual.
Although the IRS is quick to point out that a private letter ruling does not alter then tax code, and that each scenario is different, it is worth knowing that they have made allowances for similar exchanges.