Sometimes we have clients call and say that their property is being purchased as part of an eminent domain or involuntary taking and they wonder if a 1031 exchange is an option in this scenario.
There is another code section that maybe applicable in these situations - code section 1033 of the Internal Revenue Code. Under that provision you can have a longer period of time (sometimes two to three years) to redeploy the cash. Furthermore you can actually hold your own proceeds, without needed a qualified intermediary.
When to Use a 1031 Exchange
But 1033 isn't always that simple. Sometimes there are some areas of gray. Perhaps you're voluntarily selling the property to the government agency and it's not really an involuntary taking, it's more of a negotiated voluntary sale that maybe would have resulted in the involuntary taking if the parties hadn’t come to a meeting of the minds.
In those situations where the potential taking never really amounted to an actual legal proceeding and it's more of a voluntary sale on your part - in those situations it's probably better to do a 1031 exchange.
However, if you actually have been served with a condemnation notice, this is a real legal proceeding, and it's not just the threat of condemnation it's an actual taking, in those situations you know you're clearly in the 1033 category.
1031 & 1033 Exchange Professionals
In either instance you can give us a call and we can help you understand the process and give you some pointers on what to do. For example, under 1033 it’s critical that you file an election on the tax return for the first year in which you receive any payments under that eminent domain taking.
· 1031 Hotline: If you have questions about section 1033, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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