The involuntary conversion replacement period after a condemnation is the window in which the owner must buy qualifying replacement property to defer the gain on the award under Section 1033. This article is about involuntary conversions by way of condemnation. Property destroyed by fire, storm, or another casualty is also an involuntary conversion, but the rules on timing and replacement differ in places, and nothing here should be read as advice on an insurance loss. For condemned real property held for business or investment it runs three years from the end of the tax year in which the gain is first realized; for most other property it runs two years. The period can be extended for reasonable cause, but the request has to reach the IRS before the period ends. An owner who lets it lapse without asking recognizes the deferred gain on an amended return for the conversion year, with interest.
The short version. Three years to replace condemned real property, counted from the end of the first year with gain. If a lawsuit, a seller, or the market gets in the way, the IRS can give more time, but the request has to go in before the clock runs out.
When the clock starts and when it stops
The period does not start on the date of the taking. It starts at the close of the first taxable year in which any part of the gain on the conversion is realized. For an owner paid in a single award in the year of the taking, that is the end of that year. For an owner whose condemning authority deposits an estimate and pays the balance after litigation, the gain may not be realized until the deposit and later payments together exceed the property’s basis, which can be a year or more after possession changed hands. That is the rule for a condemnation award, where the amount realized is the compensation paid for the property. A casualty loss paid by insurance raises its own questions about when gain is realized and what the proceeds were paid for, and those questions are outside this article. The companion article on the 1033 involuntary conversion covers what starts the clock in detail.
The period ends three years after that close for condemned real property under Section 1033(g), two years for other property. There is no identification deadline and no intermediary, unlike a 1031 exchange. The owner simply has to close on qualifying replacement property before the last day.
Extending the involuntary conversion replacement period: who can ask and what the IRS wants to see
Treasury Regulation section 1.1033(a)-2(c)(3) allows the replacement period to be extended on application to the IRS. The owner files a written request with the IRS office where the return for the conversion year was filed. The request has to show reasonable cause for not being able to replace the property within the required time. It should be made before the period expires. A request made after the period has run is considered only if the owner also shows reasonable cause for the lateness of the request itself, which is a second, harder showing.
The IRS does not charge a fee and does not use a form. The request is a letter. It is granted or denied by letter, and the grant states the new deadline. The 1033 exchange deadline, once extended, is the date in that letter and nothing else.
What counts as reasonable cause, and what does not
The regulation does not define reasonable cause. The rulings I have seen turn on whether the owner was actually looking. An owner who was trying to replace and got stopped by something outside their control has generally received the extension. An owner who was waiting for a better market generally has not. The reasons that have supported extensions in the rulings include these:
- The award itself is still in litigation, so the amount available to reinvest is not yet known.
- Replacement property is under contract but cannot close before the deadline because of financing, title, zoning, or a seller delay.
- A natural disaster, a death, or an illness interrupted the search.
- The owner identified property and the deal fell through late in the period through no fault of the owner.
Waiting for prices to come down has not been accepted, and neither has deciding late to replace at all. The IRS wants a record of what the owner did during the period.
How to ask
- Write the request before the period ends. Date it, and keep proof of mailing or electronic filing.
- Identify the owner, the tax year of the conversion, and the return on which the Section 1033 election was made.
- Describe the property that was taken, the date of the taking, the date the gain was first realized, and the amount realized.
- Describe what has been done to replace it: properties looked at, offers made, contracts signed, and why none closed.
- Suggest a specific amount of additional time and explain why it should be enough. If the award is still in litigation, also ask the IRS to preserve the right to request a further extension if the matter has not been resolved when that time runs out.
- Keep a copy with the close-out file so the extension letter, when it comes, sits next to the election.
Practitioner note. The request should be factual and short. It is a record of what the owner did, not an argument. One page with a timeline of the search and the contracts attached is usually enough, with a specific new deadline requested and, where the award is still being litigated, a line reserving the right to come back for more time. The owner’s tax specialist should draft it with the CPA, since the CPA signed the return that carries the election.
If the extension is denied or the period lapses
If the owner does not replace within the period and no extension was granted, the deferred gain is recognized in the year it was realized, not in the year the period lapsed. That means an amended return for the earlier year, the tax on the gain, and interest from that year’s due date. An owner who sees the deadline approaching with no closing in sight should file the extension request even if the odds look poor. A denied request does no harm. A period that lapses with no request on file is a different matter.
Where a tax specialist fits
We are not the owner’s attorney and we do not negotiate awards. What we do is put the replacement deadline on the calendar the day the award is known, model what has to close by when, and draft the extension request if the market or the litigation gets in the way. 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
Can the involuntary conversion replacement period be extended?
Yes. The owner applies in writing to the IRS office where the return was filed, before the period expires, and shows reasonable cause for not having replaced the property in time. The IRS grants or denies the request by letter and the letter sets the new deadline.
What is the 1033 exchange deadline for condemned real property?
Three years after the close of the first taxable year in which any part of the gain is realized, for real property held for business or investment that is condemned or sold under threat of condemnation. Two years for other kinds of property.
How does the 1033 exchange timeline start if the award is paid in installments?
The clock starts at the end of the first year in which the payments received exceed the property’s basis, because that is the first year any gain is realized. A deposit below basis does not start the clock. The later payments do.
Is a replacement deadline closer than the closing date on the property your client wants? A free thirty-minute call with Steve Medendorp maps the extension request before the window shuts.
