Friday, May 13, 2011

Involuntary Conversions Section 1033

Involuntary Conversions - § 1033

§ 1033 provides for Nonrecognition for a cash sale followed by a reinvestment, if the cash sale qualifies as an involuntary conversion. RECOGNIZE LOSS

BROAD SCOPE : Involuntary Conversion + Reinvestment Requirement

§ 1033(a)(2)(A) requires recognition of realized gain to the extent the seller has retained an equivalent of boot. Amount not put back in property. Under § 1033(b)(2), basis formula is the equivalent of the sum of the basis of the lost property, plus any gain recognized on the involuntary conversion transaction, less any proceeds not reinvested in the similar use property.

New Basis= Purchase Price- Amount of Gain Realized but not Recognized. Don’t put in loss.  Figure out how much gain a taxpayer gained but didn’t recognize, then plug figure into the basis computation. Must reinvest in other SIMILAR PROPERTIES.

They start out with cost basis. Even applies if they did not re-invest the entire condemnation award or insurance proceeds. If you get more than you re-invest, you have to recognize that gain.

What qualifies for Section 1033 Involuntary Conversion? 

The  § 1033 like-kind exchange test looks not only to the inherent nature of the properties, but also to the nature of the taxpayer’s relationship to the property.What are they using it for? Under 1031, they must be LIKE KIND= BROADER + EASIER

Under § 1033, like USE and RELATIONSHIP, NARROW SCOPE.  If it was condemnation, the standard reverts to the like kind standard. CONDEMNATION STANDARD IS BROAD. Further, § 1033 applies to personal property and 1031 doesn't.

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