Reviewed by Robert Mendieta Jr., CCIM — Associate Broker · Commercial Division · DRE #01422904
Last updated: October 14, 2026 · More CRE guides
A 1033 exchange is the common shorthand for deferring gain under IRC Section 1033 when property is condemned, sold under threat of condemnation, destroyed or stolen, and the owner reinvests the award or insurance money in replacement property.
Not tax or legal advice. Apex Real Estate Services is not a law, tax or accounting firm and does not act as a qualified intermediary. Talk to your CPA, tax attorney and eminent-domain attorney before you sign or file anything.
What Is a 1033 Exchange?
A 1033 exchange defers gain when property is condemned, sold under threat of condemnation, destroyed or stolen. Buy qualifying replacement property within the replacement period, generally 2 years after the close of the first tax year with gain (3 for condemned business or investment real property), and gain is recognized only up to what you don’t reinvest.
It is deferral, not forgiveness: the postponed gain reduces the replacement’s basis and waits for a later taxable sale or exchange.
Key Takeaways
- Involuntary conversions only. Condemnation, a sale under threat of it, destruction, theft, seizure or requisition.
- Years, not days. The 1033 exchange rules allow 2 years after the gain year (3 for condemned business or investment real property), starting as early as the threat of condemnation.
- You can hold the money. Section 1033 does not require a qualified intermediary.
- Reinvest it all to defer it all. Spend less than the amount realized and gain is recognized up to the shortfall.
What Qualifies as an Involuntary Conversion?
An involuntary conversion happens when property is destroyed, stolen, seized, requisitioned or condemned, or sold under threat or imminence of condemnation, and the owner receives money or other property for it.
According to IRS Publication 544, a threat of condemnation exists when an authorized official tells you the government has decided to acquire your property and you have reasonable grounds to believe it will be condemned if you don’t sell.
The like-kind standard and the 3-year period apply to condemned business or investment real property, not to a building lost to fire.
The deadlineHow Long Do You Have to Reinvest? The 1033 Exchange Timeline
Generally 2 years after the end of the first tax year in which any part of the gain is realized, or 3 years for condemned business or investment real property. The period starts on the earlier of the disposition or the date the threat of condemnation began.
| Situation | Replacement period ends | Source |
|---|---|---|
| Default rule | 2 years after the close of the first tax year with realized gain | § 1033(a)(2)(B)(i) |
| Condemned business or investment real property (not held for sale) | 3 years after the close of that tax year | § 1033(g)(4) |
| Replacing by buying control of a corporation | 3-year period not available | Pub. 544 |
| Extension on application | A later date the IRS designates, usually up to 1 year more | § 1033(a)(2)(B)(ii); Pub. 544 |
The four-year period in Section 1033(h) is for principal residences in federally declared disaster areas, not commercial property.
The replacementWhat Counts as Replacement Property Under Section 1033?
The default test is property “similar or related in service or use” to what you lost; condemned business or investment real property uses the broader like-kind standard.
- Owner-users: the replacement must function the same way as the property it replaces.
- Owner-investors: it must have the same relationship of services or uses to you.
- Condemned business or investment real property: like-kind property held for business or investment qualifies, the same like-kind idea used in a 1031 exchange.
- Foreign property: unlike a 1031 exchange, U.S. and foreign real property can be like-kind when replacing condemned real property.
Property bought after the threat but before the taking qualifies if you still hold it at the taking; property acquired before the threat, or by gift or inheritance, does not. C corporations, certain C-corporation-controlled partnerships and taxpayers with more than $100,000 of realized gain on converted property in the year generally can’t buy from a related person.
The moneyHow Do the 1033 Exchange Rules Treat the Award Money?
You can take the award in cash and still defer the gain. To postpone all of it, the replacement must cost at least as much as the amount realized; spend less and you report gain up to the unspent part.
- Mortgage payoffs count. Amounts the agency pays straight to your lender are part of the condemnation award.
- Interest doesn’t. Interest for a delay in payment is reported separately as ordinary income.
- Costs come off the top. The net award is the total award minus your expenses of obtaining it.
- Severance damages are separate. They cover lost value in the part you keep; without a written amount, all proceeds count as paid for the condemned property.
1033 Exchange vs 1031 Exchange: What’s the Difference?
A 1031 exchange is voluntary, runs on 45-day and 180-day deadlines and treats taking the money first as a sale. A 1033 exchange is involuntary, runs for years and lets you hold the cash.
| Feature | 1031 exchange | 1033 involuntary conversion | Source |
|---|---|---|---|
| Trigger | Voluntary exchange of business or investment real property | Condemnation, threat of condemnation, destruction, theft, seizure or requisition | § 1031(a)(1); § 1033(a) |
| Deadline | Identify in 45 days; receive by day 180 or the return due date with extensions, if earlier | 2 years after the gain year; 3 for condemned business or investment real property | § 1031(a)(3); § 1033(a)(2)(B), (g)(4) |
| Identification | Signed written identification within 45 days | Section 1033 has no 45-day identification step | Pub. 544; § 1033 |
| Cash and intermediary | Taking the money first makes it a sale; a qualified intermediary prevents that | Covers conversion into money; Section 1033 does not require a qualified intermediary | Pub. 544; § 1033(a)(2) |
| Replacement standard | Like-kind real property | Similar or related in service or use; like-kind for condemned business or investment real property | § 1031(a)(1); § 1033(a)(1), (g)(1) |
| Partial reinvestment | Gain recognized up to money and other property received | Gain recognized to the extent the amount realized exceeds replacement cost | § 1031(b); § 1033(a)(2)(A) |
| Foreign real property | Not like-kind to U.S. property | Can be like-kind for condemned property | Pub. 544 |
See our 1031 exchange rules guide and our sale-leaseback vs. 1031 exchange comparison.
The mathHow Does the Math Work on a Condemnation Award?
Full reinvestment postpones all the gain; partial reinvestment leaves the shortfall taxable.
Hypothetical example: an investor sells a small industrial building to a public agency under threat of condemnation. The award is $3,250,000 and costs to obtain it are $50,000, so the amount realized is $3,200,000. The agency pays the $900,000 mortgage directly, so the owner’s check is $2,350,000, but the full award counts. With a $1,400,000 adjusted basis, realized gain is $1,800,000. Gain is first realized in 2026 by a calendar-year taxpayer, so the 3-year replacement period for condemned investment real property ends December 31, 2029.
| Hypothetical | A: full reinvestment | B: partial reinvestment |
|---|---|---|
| Replacement cost | $3,500,000 | $2,900,000 |
| Recognized gain | $0 | $300,000 |
| Postponed gain | $1,800,000 | $1,500,000 |
| Replacement basis | $1,700,000 | $1,400,000 |
Note the cash gap: full deferral takes $3,200,000 against a $2,350,000 check. The award dollars themselves need not be used, so financing can fill the gap; confirm it with your CPA. Some or all of Scenario B’s $300,000 may have to be reported as ordinary income on Form 4797.
The paperworkHow Do You Elect and Report a 1033 Exchange?
Attach a statement with the details to your return for the tax year in which you realize the gain. If a partnership or corporation owns the property, only the entity can elect.
- Silence counts. Under Treas. Reg. § 1.1033(a)-2, not including the gain in income in the regular manner is treated as an election.
- Fell short? If you don’t replace in time or spend less than the amount realized, file an amended return for the gain year.
- Form 4797. Report gain other than postponed gain from condemned business or profit property there.
What Does California Add?
California generally follows the federal rules for personal income tax, and its Eminent Domain Law sets how compensation is measured. Revenue and Taxation Code § 18031 applies the Internal Revenue Code subchapter containing Section 1033, “except as otherwise provided.”
- Public use only. Eminent domain may be used to acquire property only for a public use.
- Fair market value. Compensation is the highest price willing, informed parties under no particular necessity would agree to on the valuation date.
- Partial takings and goodwill. In a partial taking, owners are also compensated for any injury to the remainder; business owners can recover lost goodwill by proving the statutory conditions.
- Independent appraisal. An agency offering to buy under threat of eminent domain must offer to pay up to $5,000 of the reasonable cost of an independent appraisal by an appraiser licensed by the Office of Real Estate Appraisers (Code of Civil Procedure § 1263.025).
Apex helps condemned owners with replacement-property sourcing and underwriting: checking price with cap rate math, screening options such as an NNN investment, and working a due diligence checklist in time. A broker opinion of value can sanity-check an offer, but it is not that appraisal.
1033 Exchange: Frequently Asked Questions
What is a 1033 exchange in real estate?
It is shorthand for deferring gain under IRC Section 1033 when property is condemned, sold under threat of condemnation, destroyed or stolen. Reinvest in qualifying replacement property in time, elect deferral, and gain is recognized only on the unspent part.
How long do I have to complete a 1033 exchange?
Generally 2 years after the end of the first tax year in which any part of the gain is realized, or 3 years for condemned real property held for business or investment. Extensions are usually limited to 1 year.
Do I need a qualified intermediary for a 1033 exchange?
Section 1033 does not require one. It covers a conversion into money, and the IRS says you don’t have to use the actual award funds to buy the replacement. Qualified intermediaries are a 1031 tool.
Does selling to the government under threat of condemnation qualify?
Yes. A sale under threat or imminence of condemnation is a disposition under Section 1033.
What’s the difference between a 1031 and a 1033 exchange?
A 1031 exchange is voluntary, runs on 45-day and 180-day deadlines and treats taking the money first as a sale. A 1033 exchange follows an involuntary conversion, allows 2 or 3 years after the gain year and lets you hold the award.
Does California follow the federal 1033 rules?
For personal income tax, generally yes. Revenue and Taxation Code section 18031 applies the Internal Revenue Code subchapter that contains Section 1033, except as otherwise provided.
Replacing condemned property? Start the search early
Robert Mendieta Jr., CCIM, with more than 20 years of commercial real estate experience, will help you source and underwrite replacement property for a 1033 exchange while your CPA and attorney handle the rest.
Apex is not a law, tax or accounting firm and does not act as a qualified intermediary.
Call Robert: (951) 977-3251Or call Joseph Lombera, Commercial Agent + CMO · DRE #01971957: (909) 406-6538
Or request a free CRE consult below.
Sources (web pages accessed October 6, 2026): Legal Information Institute · 26 U.S. Code § 1033, 26 U.S. Code § 1031, 26 CFR § 1.1033(a)-2 and 26 CFR § 1.1033(g)-1 · current text. IRS · Publication 544 (2025), Sales and Other Dispositions of Assets · for 2025 returns. California Legislative Information · Revenue and Taxation Code § 18031 and Code of Civil Procedure §§ 1240.010, 1263.010, 1263.310, 1263.320, 1263.410, 1263.510 and 1263.025 · current text.
Robert Mendieta Jr., CCIM · Associate Broker · Commercial Division · DRE #01422904 · Joseph Lombera · Commercial Agent + CMO · DRE #01971957 · Apex Real Estate Services · 3750 E. Florida Ave Suite A, Hemet, CA 92544 · (951) 977-3251 · robert@apex-res.com