1033 Exchange Rules on Rental Property Jason Moghaddas asked 2 years ago
1033 Exchange Rules on Rental Property

Hello Everyone,

We had a rental property burn down-total loss. Insurance payment exceeded basis. I have heard conflicting information on how to offset the gain-anyone with expertise on 1033s questions below?

-I first understood that you could reinvest the gain in like property as an offset. For example, the house basis was 100k, insurance payment 200k so net 100k. If you invest that 100k in like property, the gain is offset?

-Then I was told I have to invest my full insurance payment in like property to offset the gain–so 200k investment required to offset the 100k gain?

-Then another company said I can offset the gain in leveraged debt on like property, with the leveraged debt value needing to be the same as the gain. So 100k invested at 2:1 leverage is 200k which offsets the gain.

Even the tax person I had got this all wrong and now is changing what they said 5 months ago. Does anyone understand 1033s?

Stuck and sick of the Dixie Fire mess.

Thank you!


1 Answers
Answer for 1033 Exchange Rules on Rental Property John Trapani Expert answered 2 years ago

Hi Jason,

Without knowing all the details of your situation, here is a short answer to your question. If the proceeds from your claim exceed the cost basis of the improvements (for a rental), net of depreciation, the full amount of the proceeds must be reinvested to defer the tax liability.

The first funds spent replace the cost basis. Then the next funds invested “absorb “the gain. The reinvestment can be rebuilding or another property that is similar in service or use to the destroyed property.

For replacements, it is not required that the actual insurance proceeds be used–new debt is perfectly allowed.

Additional details about similar in service or use:

You lost rental property. Generally, the reinvestment must be rental property.

However, as this was a federally declared disaster, the replacement can be a rental or a commercial business.

It cannot be a personal use property.

You may also need to address the value of the residual land left from the fire.

Hope that helps.