The 1033 exchange time limit depends on what was taken. The general rule gives an owner two years after the close of the year the gain is first realized to buy replacement property. Condemned real property held for productive use in a trade or business or for investment gets three years under Section 1033(g), along with an easier standard for what counts as a replacement. Which rule applies depends on the property and how it was held. It is usually the first question we settle when the award is known.
The short version. Land and buildings held for business or investment and taken by condemnation get three years and the like-kind standard. Everything else gets two years and a stricter standard. A residence has its own rules.
The two-year rule and the three-year rule
Section 1033(a)(2)(B) sets the general period: two years after the close of the first taxable year in which any part of the gain is realized. Section 1033(g)(4) replaces that with three years when the converted property is real property held for productive use in a trade or business or for investment and the conversion was a condemnation, or a sale under a threat or imminence of condemnation. The extra year is not automatic for every taking. It attaches to the real property and its holding purpose.
A farm, a rental building, a warehouse, or raw land held for appreciation gets three years. The equipment inside the warehouse is not real property for this purpose and gets two, and so does inventory. The October articles on business damages in eminent domain cover the separate tax problems those items carry.
What makes real property qualify for the three years
Three conditions have to be met together. The property is real property. It was held for productive use in a trade or business or for investment, not as a residence and not as inventory held for sale. And it was condemned, or sold under a threat or imminence of condemnation, rather than destroyed by fire or storm. A building lost to a hurricane is an involuntary conversion, but it is not a condemnation, so it gets two years and the general standard.
Mixed takings are common. A pipeline easement across a farm takes real property held for business use, so the three-year rule and the like-kind standard apply to the gain on that easement. If the same taking destroys fencing and an irrigation system, those are not real property for this purpose and run on the two-year clock.
The like-kind standard that comes with it
The general Section 1033 standard requires replacement property that is similar or related in service or use to what was taken, which is a narrow test. Section 1033(g)(1) swaps that for the like-kind standard borrowed from Section 1031: any real property held for productive use in a trade or business or for investment can replace any other. A condemned farm can be replaced with an apartment building. A condemned warehouse can be replaced with raw land held for investment. The 1033 Exchange page on this site explains the replacement-property rules in full, and the Rev. Rul. 83-49 article covers replacement after a partial taking.
How the 1033 exchange time limit compares to a 1031 exchange
A 1031 exchange gives 45 days to identify and 180 days to close, requires a qualified intermediary, and the seller may not touch the money. Section 1033 gives two or three years, requires no identification, no intermediary, and lets the owner hold the award in their own account while they look. The owner can even buy before the taking closes, as the companion article on an involuntary conversion example shows. The trade-off is that Section 1033 only applies when the sale was forced. An owner who wants to sell voluntarily is in Section 1031 territory, and 1031 Exchange page covers that road.
Practitioner note. The two statutes can meet in one file. An owner who sells a parcel under threat of condemnation may use Section 1033 for that gain and, in the same year, run a Section 1031 exchange on a voluntary sale of a different parcel. Keep the two tracks separate in the close-out file; they have different deadlines, different paperwork, and different replacement standards. See For Advisors page for what the CPA needs from each.
The trap in “the first taxable year in which any part of the gain is realized”
Both the two-year and the three-year periods are counted from the close of the first taxable year in which any part of the gain is realized, not from the date of the taking. When the award is paid in one payment in the year of the taking, those are the same year. When the condemning authority deposits an estimate and the rest comes after litigation, the gain is realized in the first year the money received exceeds basis. An owner who counts from the taking date may think there is less time than there is. The error in the other direction, counting from the final judgment, is the more expensive one. The companion article on the 1033 involuntary conversion walks through what starts the clock.
Where a tax specialist fits
We are not the owner’s attorney and we do not negotiate awards. What we do is confirm which period and which replacement standard apply before the deposit arrives, so the owner knows how long they have and what qualifies. We work alongside the owner’s attorney and CPA, not instead of them. If the owner does not need us, we say so. The first call is free.
Frequently asked questions
Is the 1033 exchange time limit two years or three?
Two years for most property. Three years for real property held for productive use in a trade or business or for investment that was condemned or sold under threat of condemnation. Both are counted from the close of the first taxable year in which any part of the gain is realized.
What is the difference between a 1033 exchange vs 1031 exchange on timing?
A 1031 exchange runs on 45 days to identify and 180 days to close, through an intermediary. A section 1033 exchange runs on two or three years, with no identification step and no intermediary, and the owner may hold the proceeds. Section 1033 applies only when the disposition was involuntary.
Do the irs 1033 exchange rules give a longer period for a principal residence?
A principal residence is not covered by the three-year rule in Section 1033(g), which is limited to business and investment real property. A residence generally has the two-year period, with a longer period available only when the loss arises in a federally declared disaster.
Not sure whether your client’s taking is on the two-year clock or the three-year clock? A free thirty-minute call with Steve Medendorp settles it before the deposit is spent.
