replacement property

Replacement property refers to property acquired to substitute for property that has been lost, destroyed, stolen, or condemned. For tax purposes, the Internal Revenue Code allows deferral of gain when replacement property is acquired under specified rules.

Under 26 U.S. Code § 1031 (commonly called a 1031 exchange), gain may be deferred when the taxpayer reinvests proceeds rather than receiving them in cash, identifies the replacement property within 45 days of selling the original property, and acquires it within 180 days or by the due date of the transferor’s tax return, if earlier.

Under 26 U.S. Code § 1033 (involuntary conversions), when property is involuntarily converted into money, such as through insurance proceeds after destruction or a condemnation award, a taxpayer may defer gain by acquiring replacement property. Unlike § 1031, § 1033 has no 45-day identification requirement and generally allows a longer replacement period, typically two years after the close of the taxable year in which the gain was realized, subject to extensions by the Secretary of the Treasury. It also applies a stricter “similar or related in service or use” standard.

[Last reviewed in September of 2025 by the Wex Definitions Team] 

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