US Asset Transaction Tax Deferral Strategies
Compare and analyze the tax benefits of Like-Kind Exchanges (§1031) and Involuntary Conversions (§1033) to find the optimal strategy for your situation.
§1031 Like-Kind Exchange
Explore how to defer capital gains tax when voluntarily upgrading or repositioning your real estate portfolio.
§1033 Involuntary Conversion
Learn how to defer taxes by reinvesting insurance proceeds or compensation after an unexpected asset loss, such as from a fire or condemnation.
§1031 vs §1033 Comparison
Get an at-a-glance comparison of the key differences between the two sections to help you make the best decision for your circumstances.
§1031 Like-Kind Exchange Analysis
§1031 is a powerful tax planning tool that allows you to reinvest the proceeds from the sale of business or investment real estate into another like-kind property without immediate tax consequences, maximizing the compounding effect of your investment capital.
Tax Impact Calculator
Relinquished Property Info
Replacement Property Info
Holding Purpose: Both relinquished and replacement properties must be held for productive use in a trade or business or for investment.
Property Type: Applies only to real property (post-TCJA).
45-Day Identification Period: Replacement properties must be identified in writing within 45 days of the transfer.
180-Day Exchange Period: The acquisition of the replacement property must be completed within 180 days.
Qualified Intermediary (QI): A QI must be used to avoid constructive receipt of funds.
"Boot" is any non-like-kind property received in an exchange. Receiving boot triggers the recognition of gain.
Cash Boot: Any cash received that is not reinvested.
Debt Boot (Mortgage Boot): Occurs if the debt on the replacement property is less than the debt on the relinquished property (net debt relief).
Important: You can offset debt boot by adding cash, but you cannot offset cash boot by taking on more debt.
Calculation Results
§1033 Involuntary Conversion Analysis
§1033 is a relief provision that allows you to defer tax liability on gains from an involuntary conversion of property (due to destruction, theft, condemnation, etc.) by reinvesting the proceeds into a qualified replacement property. It offers more flexible procedures and longer replacement periods than §1031.
Tax Impact Calculator
Converted Property & Proceeds Info
Replacement Property Info
Qualifying Events: Destruction, theft, seizure, or condemnation (or threat thereof).
Replacement Standard: Generally, the stricter "similar or related in service or use" test. However, the lenient "like-kind" test applies to condemned business/investment real property.
Replacement Period: Generally 2 years (casualty/theft) or 3 years (condemnation), offering much more time.
Receipt of Funds: No QI is needed. The taxpayer can directly receive and hold the proceeds, which provides financial flexibility.
The main advantage of §1033 is its procedural flexibility. Since you can receive the funds directly, you can restructure your finances. For example, you could receive $1M in proceeds, buy a $1M property using only $300k of the proceeds and a $700k loan, and still defer the entire gain. This frees up $700k in cash for other purposes, an outcome not possible under §1031 rules.
Calculation Results
§1031 vs. §1033 Key Comparison
| Category | §1031 Like-Kind Exchange | §1033 Involuntary Conversion |
|---|---|---|
| Triggering Event | Voluntary decision by taxpayer | Involuntary event (casualty, theft, condemnation) |
| Applicable Property | Real property only (post-TCJA) | All property types (real, personal, etc.) |
| Replacement Standard | "Like-Kind" (broad standard) | "Similar Use" (strict standard) (But "Like-Kind" for condemned real property) |
| Replacement Period | 45-day ID / 180-day acquisition (strict) | 2-4 years (flexible) |
| Handling of Funds | Qualified Intermediary (QI) is mandatory | Taxpayer can directly receive funds |
| Financial Restructuring | Restricted (due to boot rules) | Very flexible (refinancing opportunity) |
| Loss Treatment | Losses are not recognized (deferred) | Losses are generally recognized and deductible |