When the owner of property loses that property through a natural event, theft, condemnation, or otherwise, the owner may use insurance or condemnation proceeds to purchase property similar to the property that was lost. If the replacement property has a higher value than the lost property for tax purposes, the owner may be able to defer recognition of that gain for tax purposes. IRC § 1031, also referred to as a 1031 exchange, allows the owner to defer the recognition of that gain if they do not benefit from those proceeds during the replacement period and if they identify and acquire the replacement property after a certain timeframe after the loss. IRC § 1033 also allows the owner to defer recognition of replacement property. Compared with § 1031, § 1033 does not have an identification period and has a longer replacement period. However, the standard that the replacement property be similar to the original lost property is more restrictive.
[Last updated in December of 2020 by the Wex Definitions Team]