Investment property burned down.....

[Gloria C.]

I had an investment property that burned down recently.  I should have approximately $400K after mortgage is paid off.  Does anyone know if this is considered "free money"? or if I can do a 1031/1033 exchange?  Are rules for 1033 same or different from 1031?

Thanks for any advise.....

Gloria Vega

[Ashish Acharya]

@Gloria C. Sorry to hear about your property, Gloria. Here’s a quick guide to your options:

1. Insurance Proceeds and Taxability: The insurance payout you receive is not "free money." For tax purposes, it's considered a reimbursement for property damage. Any amount over your adjusted basis in the property (initial cost minus depreciation) could be subject to capital gains tax unless you reinvest it strategically.

2. 1033 Exchange (Involuntary Conversion): A 1033 exchange (involuntary conversion) is specifically designed for situations like fire, natural disasters, or eminent domain. Unlike a 1031 exchange, it gives you more flexibility in timelines and reinvestment options:

- You typically have two years (sometimes up to three) from the end of the tax year in which you receive the insurance payout to reinvest in a similar or related property.

- There’s no requirement to go through a qualified intermediary, as with a 1031 exchange.

3. 1031 Exchange: A 1031 exchange is also an option but is generally less favorable than a 1033 in involuntary situations. With a 1031, you would have to meet stricter timelines (identify a new property within 45 days and close within 180 days) and use a qualified intermediary.

Recommendation: The 1033 exchange is likely the best route if you’re looking to reinvest and defer capital gains, as it provides more flexibility.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.