Though both 1031 and 1033 exchanges let investors defer capital gains taxes, both sections are entirely different from each other. Real estate investors often fail to differentiate between 1031 and 1033 exchanges. They assume both sections to be similar. However, that's not true. Apart from the benefit of tax-deferment, there is no other similarity between 1031 and 1033 exchanges. Section 1031 of IRC - Section 1031 of IRC, commonly known as a 1031 exchange, lets investors exchange an investment property for another while deferring capital gains taxes. To qualify for a 1031 exchange, both relinquished and replacement properties must be like-kind. Properties involved in a 1031 exchange must be held for use in trade, business, or for investment purposes. A 1031 exchange can be done over and over again without any restriction.
1033 Exchange Explained, A 1033 exchange lets investors defer capital gains taxes on exchanging like-kind properties. However, unlike a 1031 exchange, where a property owner willingly exchanges one property for another, a 1033 exchange can only be performed on account of involuntary conversions, such as an eminent domain, condemnation, theft, etc. Eminent domain is the power using which a state or federal government can seize any private property from an investor for public use. In return, the investor gets the compensation or the current market value of the seized property.
Difference In Deadlines - The major difference between 1031 and 1033 exchanges is the time limit. As you may know, upon closing on the sale of the relinquished property, a 1031 investor has 180 days to complete the exchange. The investor must identify the potential replacement property within 45 days. However, in 1033 exchanges, since properties are seized from investors, they get a time limit of 2-4 years for completing the exchange. On account of losing commercial properties, the deadline will extend to 3 years. However, if an investor loses their property in a presidentially declared disaster, they get 4 years to complete the exchange. There is no identification period in 1033 exchanges. So, investors don’t need to bear the burden of identifying a replacement property within a short time of 45 days.
Nature of Properties - Another major difference between both sections is the kind of properties that can be exchanged. In a 1031 exchange, both relinquished and replacement properties need to be like-kind. For example, a multi-family unit can be exchanged for an industrial property or any other investment property. However, in 1033 exchanges, both relinquished and replacement properties must be similar in use or services. For example, a multi-family unit can only be exchanged for another multi-family unit and not for any other investment property. How To-Do A 1031 Exchange? To qualify for a 1031 exchange, both relinquished and replacement properties must be held for use in trade, business, or for investment purposes. Personal properties don't qualify for a 1031 exchange. So, you may not be able to trade your primary residence for a rental property using this unique tax-deferred exchange. To know more about 1031 rules and guidelines, you can write to us or reach out to our 1031 experts.
What do you like? A home worth $ 200,000 or $ 200,000 in bank cash. Of course you would prefer to make money because you can do anything you want. If you have a home, you must first sell it to get cash. After selling $ 200,000 through a broker, you can expect to get rid of about $ 182,000. This is when there is no need to sell your house today for the full amount without repair. Closed math, real estate brokerage fees of 6%, expenses of 3%, total $ 18,000! In most cases there are thousands of repairs, you have to negotiate an average price reduction of 5% and pay the buyer closing costs. $ 200,000 can only get about $ 170,000 in cash. Like I said, "cash is king," so getting a quick cash offer is probably your best bet.
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