Thursday, March 26, 2009 at 04:15PM | Staff Can I Elect 1033 Exchange Treatment AFTER I Filed and Paid Taxes?
Taxpayers can defer the payment of their depreciation recapture taxes and capital gain taxes when their property was converted or condemned or destroyed against their will ("involuntary conversions"). The deferral is permitted under Section 1033 of the Internal Revenue Code ("1033 exchange").
Involuntary Conversions
An involuntary conversion can occur when a government agency takes the taxpayer's property through the eminent domain (or condemnation) process. It can also occur when the property is partial or fully destroyed via a natural disaster (fire, flood, hurricane, etc.).
The end result is that the taxpayer lost some or all of his or her property through an involuntary conversion and is being compensated by the government agency if it was an eminent domain proceeding or by his or her insurance company if it was a natural disaster.
1033 Exchange Election
Generally, a taxpayer will elect to complete a 1033 exchange on his or her tax return. The 1033 exchange election would be made and filed on the income tax return in the year that the property was converted (or taken). The taxpayer then has certain deadlines during which he or she must reinvest the proceeds in order to complete the 1033 exchange and receive the tax-deferred exchange treatment under Section 1033.
Changing 1033 Exchange Election
But, what happens if the taxpayer elects to structure and complete a 1033 exchange and then is unable to reinvest the proceeds into replacement property? It becomes a failed 1033 exchange and the taxpayer would need to amend his or her income tax return for the year in which the original 1033 election was made and pay the appropriate taxes and interest charges and any potential penalties that might be assessed.
Alternatively, the taxpayer may have just filed his or her income tax return and paid the applicable taxes and then decided later to reinvest by acquiring replacement property or rebuilding the property that was destroyed. The taxpayer can do so within the applicable time deadlines and then amend the income tax return for the year in which the taxes were reported and paid and claim a refund.
