Tenant-in-Common
1031 Exchange Resources
Code and Legal References
Sec. 1033. Involuntary conversions
TITLE 26,
Subtitle A,
CHAPTER 1,
Subchapter O,
PART III,
Sec. 1033.
STATUTE
- (a) General rule
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 -
- (1) Conversion into similar property
Into property similar or related in service or use to the
property so converted, no gain shall be recognized.
- (2) Conversion into money
Into money or into property not similar or related in service
or use to the converted property, the gain (if any) shall be
recognized except to the extent hereinafter provided in this
paragraph:
- (A) Nonrecognition of gain
If the taxpayer during the period specified in subparagraph
(B), for the purpose of replacing the property so converted,
purchases other property similar or related in service or use
to the property so converted, or purchases stock in the
acquisition of control of a corporation owning such other
property, at the election of the taxpayer the gain shall be
recognized only to the extent that the amount realized upon
such conversion (regardless of whether such amount is received
in one or more taxable years) exceeds the cost of such other
property or such stock. Such election shall be made at such
time and in such manner as the Secretary may by regulations
prescribe. For purposes of this paragraph -
- (i) no property or stock acquired before the disposition of
the converted property shall be considered to have been
acquired for the purpose of replacing such converted property
unless held by the taxpayer on the date of such disposition;
and
- (ii) the taxpayer shall be considered to have purchased
property or stock only if, but for the provisions of
subsection (b) of this section, the unadjusted basis of such
property or stock would be its cost within the meaning of
section 1012.
- (B) Period within which property must be replaced
The period referred to in subparagraph (A) shall be the
period beginning with the date of the disposition of the
converted property, or the earliest date of the threat or
imminence of requisition or condemnation of the converted
property, whichever is the earlier, and ending -
- (i) 2 years after the close of the first taxable year in
which any part of the gain upon the conversion is realized,
or
- (ii) subject to such terms and conditions as may be
specified by the Secretary, at the close of such later date
as the Secretary may designate on application by the
taxpayer. Such application shall be made at such time and in
such manner as the Secretary may by regulations prescribe.
- (C) Time for assessment of deficiency attributable to gain upon
conversion
If a taxpayer has made the election provided in subparagraph
(A), then -
- (i) the statutory period for the assessment of any
deficiency, for any taxable year in which any part of the
gain on such conversion is realized, attributable to such
gain shall not expire prior to the expiration of 3 years from
the date the Secretary is notified by the taxpayer (in such
manner as the Secretary may by regulations prescribe) of the
replacement of the converted property or of an intention not
to replace, and
- (ii) such deficiency may be assessed before the expiration
of such 3-year period notwithstanding the provisions of
section 6212(c) or the provisions of any other law or rule of
law which would otherwise prevent such assessment.
- (D) Time for assessment of other deficiencies attributable to
election
If the election provided in subparagraph (A) is made by the
taxpayer and such other property or such stock was purchased
before the beginning of the last taxable year in which any part
of the gain upon such conversion is realized, any deficiency,
to the extent resulting from such election, for any taxable
year ending before such last taxable year may be assessed
(notwithstanding the provisions of section 6212(c) or 6501 or
the provisions of any other law or rule of law which would
otherwise prevent such assessment) at any time before the
expiration of the period within which a deficiency for such
last taxable year may be assessed.
- (E) Definitions
For purposes of this paragraph -
- (i) Control
The term "control" means the ownership of stock possessing
at least 80 percent of the total combined voting power of all
classes of stock entitled to vote and at least 80 percent of
the total number of shares of all other classes of stock of
the corporation.
- (ii) Disposition of the converted property
The term "disposition of the converted property" means the
destruction, theft, seizure, requisition, or condemnation of
the converted property, or the sale or exchange of such
property under threat or imminence of requisition or
condemnation.
- (b) Basis of property acquired through involuntary conversion
- (1) Conversions described in subsection (a)(1)
If the property was acquired as the result of a compulsory or
involuntary conversion described in subsection (a)(1), the basis
shall be the same as in the case of the property so converted -
- (A) decreased in the amount of any money received by the
taxpayer which was not expended in accordance with the
provisions of law (applicable to the year in which such
conversion was made) determining the taxable status of the gain
or loss upon such conversion, and
- (B) increased in the amount of gain or decreased in the
amount of loss to the taxpayer recognized upon such conversion
under the law applicable to the year in which such conversion
was made.
- (2) Conversions described in subsection (a)(2)
In the case of property purchased by the taxpayer in a
transaction described in subsection (a)(2) which resulted in the
nonrecognition of any part of the gain realized as the result of
a compulsory or involuntary conversion, the basis shall be the
cost of such property decreased in the amount of the gain not so
recognized; and if the property purchased consists of more than 1
piece of property, the basis determined under this sentence shall
be allocated to the purchased properties in proportion to their
respective costs.
- (3) Property held by corporation the stock of which is
replacement property
- (A) In general
If the basis of stock in a corporation is decreased under
paragraph (2), an amount equal to such decrease shall also be
applied to reduce the basis of property held by the corporation
at the time the taxpayer acquired control (as defined in
subsection (a)(2)(E)) of such corporation.
- (B) Limitation
Subparagraph (A) shall not apply to the extent that it would
(but for this subparagraph) require a reduction in the
aggregate adjusted bases of the property of the corporation
below the taxpayer's adjusted basis of the stock in the
corporation (determined immediately after such basis is
decreased under paragraph (2)).
- (C) Allocation of basis reduction
The decrease required under subparagraph (A) shall be
allocated -
- (i) first to property which is similar or related in
service or use to the converted property,
- (ii) second to depreciable property (as defined in section
1017(b)(3)(B)) not described in clause (i), and
- (iii) then to other property.
- (D) Special rules
- (i) Reduction not to exceed adjusted basis of property
No reduction in the basis of any property under this
paragraph shall exceed the adjusted basis of such property
(determined without regard to such reduction).
- (ii) Allocation of reduction among properties
If more than 1 property is described in a clause of
subparagraph (C), the reduction under this paragraph shall be
allocated among such property in proportion to the adjusted
bases of such property (as so determined).
- (c) Property sold pursuant to reclamation laws
For purposes of this subtitle, if property lying within an
irrigation project is sold or otherwise disposed of in order to
conform to the acreage limitation provisions of Federal reclamation
laws, such sale or disposition shall be treated as an involuntary
conversion to which this section applies.
- (d) Livestock destroyed by disease
For purposes of this subtitle, if livestock are destroyed by or
on account of disease, or are sold or exchanged because of disease,
such destruction or such sale or exchange shall be treated as an
involuntary conversion to which this section applies.
- (e) Livestock sold on account of drought, flood, or other
weather-related conditions
For purposes of this subtitle, the sale or exchange of livestock
(other than poultry) held by a taxpayer for draft, breeding, or
dairy purposes in excess of the number the taxpayer would sell if
he followed his usual business practices shall be treated as an
involuntary conversion to which this section applies if such
livestock are sold or exchanged by the taxpayer solely on account
of drought, flood, or other weather-related conditions.
- (f) Replacement of livestock with other farm property where there
has been environmental contamination
For purposes of subsection (a), if, because of soil contamination
or other environmental contamination, it is not feasible for the
taxpayer to reinvest the proceeds from compulsorily or
involuntarily converted livestock in property similar or related in
use to the livestock so converted, other property (including real
property) used for farming purposes shall be treated as property
similar or related in service or use to the livestock so converted.
- (g) Condemnation of real property held for productive use in trade
or business or for investment
- (1) Special rule
For purposes of subsection (a), if real property (not including
stock in trade or other property held primarily for sale) held
for productive use in trade or business or for investment is (as
the result of its seizure, requisition, or condemnation, or
threat or imminence thereof) compulsorily or involuntarily
converted, property of a like kind to be held either for
productive use in trade or business or for investment shall be
treated as property similar or related in service or use to the
property so converted.
- (2) Limitations
Paragraph (1) shall not apply to the purchase of stock in the
acquisition of control of a corporation described in subsection
(a)(2)(A).
- (3) Election to treat outdoor advertising displays as real
property
- (A) In general
A taxpayer may elect, at such time and in such manner as the
Secretary may prescribe, to treat property which constitutes an
outdoor advertising display as real property for purposes of
this chapter. The election provided by this subparagraph may
not be made with respect to any property with respect to which
an election under section 179(a) (relating to election to
expense certain depreciable business assets) is in effect.
- (B) Election
An election made under subparagraph (A) may not be revoked
without the consent of the Secretary.
- (C) Outdoor advertising display
For purposes of this paragraph, the term "outdoor advertising
display" means a rigidly assembled sign, display, or device
permanently affixed to the ground or permanently attached to a
building or other inherently permanent structure constituting,
or used for the display of, a commercial or other advertisement
to the public.
- (D) Character of replacement property
For purposes of this subsection, an interest in real property
purchased as replacement property for a compulsorily or
involuntarily converted outdoor advertising display defined in
subparagraph (C) (and treated by the taxpayer as real property)
shall be considered property of a like kind as the property
converted without regard to whether the taxpayer's interest in
the replacement property is the same kind of interest the
taxpayer held in the converted property.
- (4) Special rule
In the case of a compulsory or involuntary conversion described
in paragraph (1), subsection (a)(2)(B)(i) shall be applied by
substituting "3 years" for "2 years".
- (h) Special rules for property damaged by Presidentially declared
disasters
- (1) Principal residences
If the taxpayer's principal residence or any of its contents is
compulsorily or involuntarily converted as a result of a
Presidentially declared disaster -
- (A) Treatment of insurance proceeds
- (i) Exclusion for unscheduled personal property
No gain shall be recognized by reason of the receipt of any
insurance proceeds for personal property which was part of
such contents and which was not scheduled property for
purposes of such insurance.
- (ii) Other proceeds treated as common fund
In the case of any insurance proceeds (not described in
clause (i)) for such residence or contents -
- (I) such proceeds shall be treated as received for the
conversion of a single item of property, and
- (II) any property which is similar or related in service
or use to the residence so converted (or contents thereof)
shall be treated for purposes of subsection (a)(2) as
property similar or related in service or use to such
single item of property.
- (B) Extension of replacement period
Subsection (a)(2)(B) shall be applied with respect to any
property so converted by substituting "4 years" for "2 years".
- (2) Trade or business and investment property
If a taxpayer's property held for productive use in a trade or
business or for investment is compulsorily or involuntarily
converted as a result of a Presidentially declared disaster,
tangible property of a type held for productive use in a trade or
business shall be treated for purposes of subsection (a) as
property similar or related in service or use to the property so
converted.
- (3) Presidentially declared disaster
For purposes of this subsection, the term "Presidentially
declared disaster" means any disaster which, with respect to the
area in which the property is located, resulted in a subsequent
determination by the President that such area warrants assistance
by the Federal Government under the Disaster Relief and Emergency
Assistance Act.
- (4) Principal residence
For purposes of this subsection, the term "principal residence"
has the same meaning as when used in section 121, except that
such term shall include a residence not treated as a principal
residence solely because the taxpayer does not own the residence.
- (i) Replacement property must be acquired from unrelated person in
certain cases
- (1) In general
If the property which is involuntarily converted is held by a
taxpayer to which this subsection applies, subsection (a) shall
not apply if the replacement property or stock is acquired from a
related person. The preceding sentence shall not apply to the
extent that the related person acquired the replacement property
or stock from an unrelated person during the period applicable
under subsection (a)(2)(B).
- (2) Taxpayers to which subsection applies
This subsection shall apply to -
- (A) a C corporation,
- (B) a partnership in which 1 or more C corporations own,
directly or indirectly (determined in accordance with section
707(b)(3)), more than 50 percent of the capital interest, or
profits interest, in such partnership at the time of the
involuntary conversion, and
- (C) any other taxpayer if, with respect to property which is
involuntarily converted during the taxable year, the aggregate
of the amount of realized gain on such property on which there
is realized gain exceeds $100,000.
In the case of a partnership, subparagraph (C) shall apply with
respect to the partnership and with respect to each partner. A
similar rule shall apply in the case of an S corporation and its
shareholders.
- (3) Related person
For purposes of this subsection, a person is related to another
person if the person bears a relationship to the other person
described in section 267(b) or 707(b)(1).
- (j) Sales or exchanges to implement microwave relocation policy
- (1) In general
For purposes of this subtitle, if a taxpayer elects the
application of this subsection to a qualified sale or exchange,
such sale or exchange shall be treated as an involuntary
conversion to which this section applies.
- (2) Qualified sale or exchange
For purposes of paragraph (1), the term "qualified sale or
exchange" means a sale or exchange before January 1, 2000, which
is certified by the Federal Communications Commission as having
been made by a taxpayer in connection with the relocation of the
taxpayer from the 1850-1990MHz spectrum by reason of the Federal
Communications Commission's reallocation of that spectrum for use
for personal communications services. The Commission shall
transmit copies of certifications under this paragraph to the
Secretary.
- (k) Cross references
- (1) For determination of the period for which the taxpayer
has held property involuntarily converted, see section 1223.
- (2) For treatment of gains from involuntary conversions as
capital gains in certain cases, see section 1231(a).
- (3) For exclusion from gross income of gain from involuntary
conversion of principal residence, see section 121.