Question

We had a rental 2 unit that burned down can we build a unit that we partially live in as exchange. renting out 1/2? for 10-33 exchange

Forum|Forum|4 years ago
December 10, 2021
2 replies
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The property we plan to build on we owned a small cabin as rented it out. we now want to tear down and build property with the proceeds from the 1033 but live in part and rent out other part

TurboTax Online

Carl11_2

Employee

While 1033 is for a "forced conversion", I think you're referring to a 1031 exchange.

can we build a unit that we partially live in as exchange. renting out 1/2? for 10-33 exchange

Simple answer - No.

This is not a forced conversion of anything. So 1033 doesn't apply.

You are not relinquishing one property for a replacement like-kind property. So a 1031 exchange doesn't apply.

K

kaylam2Author

I was told by something at Turbo last year that we had up to 3 years to use the insurance proceeds from the fire at our rental property and that we could put it into our other rental property if we were rebuilding that unit? We did not want to rebuild on same property as fire as it wasn't worth it so our plan was to replace one of our rental property with a new property (tear it down and build) so the accountant tell me wrong info. This was our plan and the follow up question was can we live in part of that. But are you saying we can't do this at all?

Carl11_2

Employee

I searched this forum to see if you had another thread with anyone else, and find nothing. So I can't know for sure what anyone else, including someone at TTX, may have told you.

I am assuming the property was declared a total loss by the insurance company. Understand that while it may be a total loss for the insurance company, it is not a total loss for you. Not by any stretch.

Your insurance only covers the structure. Property insurance does not insure land. Therefore, while you may have had a payout from the insurance company for the total policy amount, you still own the land. That doesn't change.

Now the insurance payout was most likely reportable on your tax return in the tax year you received the payout. (reporable doesn't mean it was taxable. There's a difference between reportable, and taxable.)

As for what you use the insurance proceeds for, or when you use those proceeds doesn't really matter and changes nothing. I don't know anything about "within three years", as I've never heard anything of the such before. Basically, if the insurance payout resulted in a gain (and it most likely did) then the gain is taxable income to you. Generally, that gain will only be a small portion of the payout - depending on to many factors to cover here. Other things that matter when it comes to taxability, is in what tax year the loss occurred, and what tax year you were paid by the insurance.

But in the end, what you do with the payout proceeds doesn't matter. You can rebuild on the same property, rebuild on a different property, or use that money for a round-the-world vacation.

M

Mike9241

this is IRS reg

it covers involuntary conversions that include destruction of the property so 1033 could apply in your situation

§ 1.1033(a)-1 Involuntary conversions; nonrecognition of gain.

(a) In general. Section 1033 applies to cases where property is compulsorily or involuntarily converted. An involuntary conversion may be the result of the destruction of property in whole or in part, the theft of property, the seizure of property, the requisition or condemnation of property, or the threat or imminence of requisition or condemnation of property. An involuntary conversion may be a conversion into similar property or into money or into dissimilar property. Section 1033 provides that, under certain specified circumstances, any gain which is realized from an involuntary conversion shall not be recognized. In cases where property is converted into other property similar or related in service or use to the converted property, no gain shall be recognized regardless of when the disposition of the converted property occurred and regardless of whether or not the taxpayer elects to have the gain not recognized. In other types of involuntary conversion cases, however, the proceeds arising from the disposition of the converted property must (within the time limits specified) be reinvested in similar property in order to avoid recognition of any gain realized. Section 1033 applies only with respect to gains; losses from involuntary conversions are recognized or not recognized without regard to this section.

iRC code SEC 1033(a)(2)(A) &(B)

(A)Nonrecognition of gainIf the taxpayer during the period specified in subparagraph (B), for the purpose of replacing the property so converted, purchases other property similar or related in service or use to the property so converted, or purchases stock in the acquisition of control of a corporation owning such other property, at the election of the taxpayer the gain shall be recognized only to the extent that the amount realized upon such conversion (regardless of whether such amount is received in one or more taxable years) exceeds the cost of such other property or such stock. Such election shall be made at such time and in such manner as the Secretary may by regulations prescribe.

(B)Period within which property must be replaced

The period referred to in subparagraph (A) shall be the period beginning with the date of the disposition of the converted property, or the earliest date of the threat or imminence of requisition or condemnation of the converted property, whichever is the earlier, and ending

(i)

2 years after the close of the first taxable year in which any part of the gain upon the conversion is realized, or

so you have 2 years after receiving any insurance proceed to procure replacement property

REG 1.1033(a)-2

(c) Conversion into money or into dissimilar property.

(1) If property (as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof) is compulsorily or involuntarily converted into money or into property not similar or related in service or use to the converted property, the gain, if any, shall be recognized, at the election of the taxpayer, only to the extent that the amount realized upon such conversion exceeds the cost of other property purchased by the taxpayer which is similar or related in service or use to the property so converted, or the cost of stock of a corporation owning such other property which is purchased by the taxpayer in the acquisition of control of such corporation, if the taxpayer purchased such other property, or such stock, for the purpose of replacing the property so converted and during the period specified in subparagraph (3) of this paragraph. For the purposes of section 1033, the term control means the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation.

this means that the portion of proceeds used for your personal residence will not qualify for deferral

reg 1.1033(a)-2(c) this specifies what must be included in your return in the year the involuntary conversion occurs to the extent that you want to defer gain. this is somewhat complicated. if you mess up the IRS can deny deferral. therefore, I strongly recommend that you use the services of a tax pro if you desire to defer gain

(2) All of the details in connection with an involuntary conversion of property at a gain (including those relating to the replacement of the converted property, or a decision not to replace, or the expiration of the period for replacement) shall be reported in the return for the taxable year or years in which any of such gain is realized. An election to have such gain recognized only to the extent provided in subparagraph (1) of this paragraph shall be made by including such gain in gross income for such year or years only to such extent. If, at the time of filing such a return, the period within which the converted property must be replaced has expired, or if such an election is not desired, the gain should be included in gross income for such year or years in the regular manner. A failure to so include such gain in gross income in the regular manner shall be deemed to be an election by the taxpayer to have such gain recognized only to the extent provided in subparagraph (1) of this paragraph even though the details in connection with the conversion are not reported in such return. If, after having made an election under section 1033(a)(2), the converted property is not replaced within the required period of time, or replacement is made at a cost lower than was anticipated at the time of the election, or a decision is made not to replace, the tax liability for the year or years for which the election was made shall be recomputed. Such recomputation should be in the form of an amended return. If a decision is made to make an election under section 1033(a)(2) after the filing of the return and the payment of the tax for the year or years in which any of the gain on an involuntary conversion is realized and before the expiration of the period within which the converted property must be replaced, a claim for credit or refund for such year or years should be filed. If the replacement of the converted property occurs in a year or years in which none of the gain on the conversion is realized, all of the details in connection with such replacement shall be reported in the return for such year or years.

Critter-3

Since you have an unusual and uncommon situation I highly recommend you seek local professional assistance and not rely on nameless faceless internet voices. If many homes were destroyed in a fire then a local tax pro would be up to speed on how to handle this kind of thing.