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Internal Reenue Code
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Subtitle ! Income Taxes ""#$#%&'
Chapter # ()RM!L T!*+S !(, S-RT!*+S ""#$#'..T
Subchapter ) /ain or Loss on ,isposition o0 1roperty ""#..#$####
1art III C)MM)( ()(T!*!2L+ +*C3!(/+S ""#.4#$#.'%
"#.44 Inoluntary conersions5
Internal Revenue Code
1033 Involuntary conversions.
(a) General rule.
I0 property 6as a result o0 its destruction in 7hole or in part, the0t, sei8ure, or
re9uisition or condemnation or threat or imminence thereo0: is compulsorily or
inoluntarily conerted;
(1) Conversion into similar property.
Into property similar or related in serice or use to the property so
conerted, no gain shall be recogni8ed5
(2) Conversion into money.
Into money or into property not similar or related in serice or use to the
conerted property, the gain 6i0 any: shall be recogni8ed except to the
extent hereina0ter proided in this paragraph<
6!: (onrecognition o0 gain5 I0 the taxpayer during the period
speci0ied in subparagraph 62: , 0or the purpose o0 replacing the
property so conerted, purchases other property similar or related
in serice or use to the property so conerted, or purchases stock
in the ac9uisition o0 control o0 a corporation o7ning such other
property, at the election o0 the taxpayer the gain shall be
recogni8ed only to the extent that the amount reali8ed upon such
conersion 6regardless o0 7hether such amount is receied in one
or more taxable years: exceeds the cost o0 such other property or
such stock5 Such election shall be made at such time and in such
manner as the Secretary may by regulations prescribe5 For
purposes o0 this paragraph ;
6i: no property or stock ac9uired be0ore the disposition o0
the conerted property shall be considered to hae been
ac9uired 0or the purpose o0 replacing such conerted
property unless held by the taxpayer on the date o0 such
disposition= and
6ii: the taxpayer shall be considered to hae purchased
property or stock only i0, but 0or the proisions o0
subsection 6b: o0 this section , the unad>usted basis o0 such
property or stock 7ould be its cost 7ithin the meaning o0
section #.#? 5
62: 1eriod 7ithin 7hich property must be replaced5 The period
re0erred to in subparagraph 6!: shall be the period beginning 7ith
the date o0 the disposition o0 the conerted property, or the earliest
date o0 the threat or imminence o0 re9uisition or condemnation o0
the conerted property, 7hicheer is the earlier, and ending;
6i: ? years a0ter the close o0 the 0irst taxable year in 7hich
any part o0 the gain upon the conersion is reali8ed, or
6ii: sub>ect to such terms and conditions as may be
speci0ied by the Secretary, at the close o0 such later date as
the Secretary may designate on application by the
taxpayer5 Such application shall be made at such time and
in such manner as the Secretary may by regulations
prescribe5
6C: Time 0or assessment o0 de0iciency attributable to gain upon
conersion5 I0 a taxpayer has made the election proided in
subparagraph 6!: , then;
6i: the statutory period 0or the assessment o0 any
de0iciency, 0or any taxable year in 7hich any part o0 the
gain on such conersion is reali8ed, attributable to such
gain shall not expire prior to the expiration o0 4 years 0rom
the date the Secretary is noti0ied by the taxpayer 6in such
manner as the Secretary may by regulations prescribe: o0
the replacement o0 the conerted property or o0 an
intention not to replace, and
6ii: such de0iciency may be assessed be0ore the expiration
o0 such 4$year period not7ithstanding the proisions o0
section &?#?6c: or the proisions o0 any other la7 or rule o0
la7 7hich 7ould other7ise preent such assessment5
6,: Time 0or assessment o0 other de0iciencies attributable to
election5 I0 the election proided in subparagraph 6!: is made by
the taxpayer and such other property or such stock 7as purchased
be0ore the beginning o0 the last taxable year in 7hich any part o0
the gain upon such conersion is reali8ed, any de0iciency, to the
extent resulting 0rom such election, 0or any taxable year ending
be0ore such last taxable year may be assessed 6not7ithstanding
the proisions o0 section &?#?6c: or &%.# or the proisions o0 any
other la7 or rule o0 la7 7hich 7ould other7ise preent such
assessment: at any time be0ore the expiration o0 the period 7ithin
7hich a de0iciency 0or such last taxable year may be assessed5
6+: ,e0initions5 For purposes o0 this paragraph ;
6i: Control5 The term @controlA means the o7nership o0
stock possessing at least B. percent o0 the total combined
oting po7er o0 all classes o0 stock entitled to ote and at
least B. percent o0 the total number o0 shares o0 all other
classes o0 stock o0 the corporation5
6ii: ,isposition o0 the conerted property5 The term
@disposition o0 the conerted propertyA means the
destruction, the0t, sei8ure, re9uisition, or condemnation o0
the conerted property, or the sale or exchange o0 such
property under threat or imminence o0 re9uisition or
condemnation5
(b) Basis o property ac!uired t"rou#" involuntary conversion.
(1) Conversions described in subsection (a)(1) .
I0 the property 7as ac9uired as the result o0 a compulsory or inoluntary
conersion described in subsection 6a:6#: , the basis shall be the same as
in the case o0 the property so conerted;
6!: decreased in the amount o0 any money receied by the
taxpayer 7hich 7as not expended in accordance 7ith the
proisions o0 la7 6applicable to the year in 7hich such conersion
7as made: determining the taxable status o0 the gain or loss upon
such conersion, and
62: increased in the amount o0 gain or decreased in the amount o0
loss to the taxpayer recogni8ed upon such conersion under the
la7 applicable to the year in 7hich such conersion 7as made5
(2) Conversions described in subsection (a)(2) .
In the case o0 property purchased by the taxpayer in a transaction
described in subsection 6a:6?: 7hich resulted in the nonrecognition o0 any
part o0 the gain reali8ed as the result o0 a compulsory or inoluntary
conersion, the basis shall be the cost o0 such property decreased in the
amount o0 the gain not so recogni8ed= and i0 the property purchased
consists o0 more than # piece o0 property, the basis determined under this
sentence shall be allocated to the purchased properties in proportion to
their respectie costs5
(3) $roperty "eld by corporation t"e stoc% o &"ic" is replacement
property.
6!: In general5 I0 the basis o0 stock in a corporation is decreased
under paragraph 6?: , an amount e9ual to such decrease shall also
be applied to reduce the basis o0 property held by the corporation
at the time the taxpayer ac9uired control 6as de0ined in subsection
6a:6?:6+: : o0 such corporation5
62: Limitation5 Subparagraph 6!: shall not apply to the extent that
it 7ould 6but 0or this subparagraph: re9uire a reduction in the
aggregate ad>usted bases o0 the property o0 the corporation belo7
the taxpayerCs ad>usted basis o0 the stock in the corporation
6determined immediately a0ter such basis is decreased under
paragraph 6?: :5
6C: !llocation o0 basis reduction5 The decrease re9uired under
subparagraph 6!: shall be allocated;
6i: 0irst to property 7hich is similar or related in serice or
use to the conerted property,
6ii: second to depreciable property 6as de0ined in section
#.#D6b:64:62: : not described in clause 6i: , and
6iii: then to other property5
6,: Special rules5
6i: Reduction not to exceed ad>usted basis o0 property5 (o
reduction in the basis o0 any property under this paragraph
shall exceed the ad>usted basis o0 such property
6determined 7ithout regard to such reduction:5
6ii: !llocation o0 reduction among properties5 I0 more than #
property is described in a clause o0 subparagraph 6C: , the
reduction under this paragraph shall be allocated among
such property in proportion to the ad>usted bases o0 such
property 6as so determined:5
(c) $roperty sold pursuant to reclamation la&s.
For purposes o0 this subtitle, i0 property lying 7ithin an irrigation pro>ect is sold or
other7ise disposed o0 in order to con0orm to the acreage limitation proisions o0
Federal reclamation la7s, such sale or disposition shall be treated as an
inoluntary conersion to 7hich this section applies5
(d) 'ivestoc% destroyed by disease.
For purposes o0 this subtitle, i0 liestock are destroyed by or on account o0
disease, or are sold or exchanged because o0 disease, such destruction or such
sale or exchange shall be treated as an inoluntary conersion to 7hich this
section applies5
(e) 'ivestoc% sold on account o drou#"t( lood( or ot"er &eat"er)related
conditions.
(1) In #eneral.
For purposes o0 this subtitle, the sale or exchange o0 liestock 6other than
poultry: held by a taxpayer 0or dra0t, breeding, or dairy purposes in excess
o0 the number the taxpayer 7ould sell i0 he 0ollo7ed his usual business
practices shall be treated as an inoluntary conersion to 7hich this
section applies i0 such liestock are sold or exchanged by the taxpayer
solely on account o0 drought, 0lood, or other 7eather$related conditions5
(2) *+tension o replacement period.
6!: In general5 In the case o0 drought, 0lood, or other 7eather$
related conditions described in paragraph 6#: 7hich result in the
area being designated as eligible 0or assistance by the Federal
/oernment, subsection 6a:6?:62: shall be applied 7ith respect to
any conerted property by substituting @' yearsA 0or @? yearsA5
62: Further extension by Secretary5 The Secretary may extend on a
regional basis the period 0or replacement under this section 6a0ter
the application o0 subparagraph 6!: : 0or such additional time as
the Secretary determines appropriate i0 the 7eather$related
conditions 7hich resulted in such application continue 0or more
than 4 years5
() Replacement o livestoc% &it" ot"er arm property in certain cases.
For purposes o0 subsection 6a: , i0, because o0 drought, 0lood, or other 7eather$
related conditions, or soil contamination or other enironmental contamination, it
is not 0easible 0or the taxpayer to reinest the proceeds 0rom compulsorily or
inoluntarily conerted liestock in property similar or related in use to the
liestock so conerted, other property 6including real property in the case o0 soil
contamination or other enironmental contamination: used 0or 0arming purposes
shall be treated as property similar or related in serice or use to the liestock so
conerted5
(#) Condemnation o real property "eld or productive use in trade or
business or or investment.
(1) ,pecial rule.
For purposes o0 subsection 6a: , i0 real property 6not including stock in
trade or other property held primarily 0or sale: held 0or productie use in
trade or business or 0or inestment is 6as the result o0 its sei8ure,
re9uisition, or condemnation, or threat or imminence thereo0:
compulsorily or inoluntarily conerted, property o0 a like kind to be held
either 0or productie use in trade or business or 0or inestment shall be
treated as property similar or related in serice or use to the property so
conerted5
(2) 'imitation.
1aragraph 6#: shall not apply to the purchase o0 stock in the ac9uisition o0
control o0 a corporation described in subsection 6a:6?:6!: 5
(3) *lection to treat outdoor advertisin# displays as real property.
6!: In general5 ! taxpayer may elect, at such time and in such
manner as the Secretary may prescribe, to treat property 7hich
constitutes an outdoor adertising display as real property 0or
purposes o0 this chapter5 The election proided by this
subparagraph may not be made 7ith respect to any property 7ith
respect to 7hich an election under section #DE6a: 6relating to
election to expense certain depreciable business assets: is in
e00ect5
62: +lection5 !n election made under subparagraph 6!: may not be
reoked 7ithout the consent o0 the Secretary5
6C: )utdoor adertising display5 For purposes o0 this paragraph ,
the term @outdoor adertising displayA means a rigidly assembled
sign, display, or deice permanently a00ixed to the ground or
permanently attached to a building or other inherently permanent
structure constituting, or used 0or the display o0, a commercial or
other adertisement to the public5
6,: Character o0 replacement property5 For purposes o0 this
subsection , an interest in real property purchased as replacement
property 0or a compulsorily or inoluntarily conerted outdoor
adertising display de0ined in subparagraph 6C: 6and treated by the
taxpayer as real property: shall be considered property o0 a like
kind as the property conerted 7ithout regard to 7hether the
taxpayerCs interest in the replacement property is the same kind o0
interest the taxpayer held in the conerted property5
(-) ,pecial rule.
In the case o0 a compulsory or inoluntary conersion described in
paragraph 6#: , subsection 6a:6?:62:6i: shall be applied by substituting @4
yearsA 0or @? yearsA5
(") ,pecial rules or property dama#ed by $residentially declared
disasters.
(1) $rincipal residences.
I0 the taxpayerCs principal residence or any o0 its contents is compulsorily
or inoluntarily conerted as a result o0 a 1residentially declared disaster;
6!: Treatment o0 insurance proceeds5
6i: +xclusion 0or unscheduled personal property5 (o gain
shall be recogni8ed by reason o0 the receipt o0 any
insurance proceeds 0or personal property 7hich 7as part o0
such contents and 7hich 7as not scheduled property 0or
purposes o0 such insurance5
6ii: )ther proceeds treated as common 0und5 In the case o0
any insurance proceeds 6not described in clause 6i: : 0or
such residence or contents;
6I: such proceeds shall be treated as receied 0or
the conersion o0 a single item o0 property, and
6II: any property 7hich is similar or related in
serice or use to the residence so conerted 6or
contents thereo0: shall be treated 0or purposes o0
subsection 6a:6?: as property similar or related in
serice or use to such single item o0 property5
62: +xtension o0 replacement period5 Subsection 6a:6?:62: shall be
applied 7ith respect to any property so conerted by substituting
@' yearsA 0or @? yearsA5
(2) .rade or business and investment property.
I0 a taxpayerCs property held 0or productie use in a trade or business or
0or inestment is compulsorily or inoluntarily conerted as a result o0 a
1residentially declared disaster, tangible property o0 a type held 0or
productie use in a trade or business shall be treated 0or purposes o0
subsection 6a: as property similar or related in serice or use to the
property so conerted5
(3) $residentially declared disaster.
For purposes o0 this subsection , the term @1residentially declared
disasterA means any disaster 7hich, 7ith respect to the area in 7hich the
property is located, resulted in a subse9uent determination by the
1resident that such area 7arrants assistance by the Federal /oernment
under the Robert T5 Sta00ord ,isaster Relie0 and +mergency !ssistance !ct5
(-) $rincipal residence.
For purposes o0 this subsection , the term @principal residenceA has the
same meaning as 7hen used in section #?# , except that such term shall
include a residence not treated as a principal residence solely because the
taxpayer does not o7n the residence5
(i) Replacement property must be ac!uired rom unrelated person in
certain cases.
(1) In #eneral.
I0 the property 7hich is inoluntarily conerted is held by a taxpayer to
7hich this subsection applies, subsection 6a: shall not apply i0 the
replacement property or stock is ac9uired 0rom a related person5 The
preceding sentence shall not apply to the extent that the related person
ac9uired the replacement property or stock 0rom an unrelated person
during the period applicable under subsection 6a:6?:62: 5
(2) .a+payers to &"ic" subsection applies.
This subsection shall apply to;
6!: a C corporation,
62: a partnership in 7hich # or more C corporations o7n, directly
or indirectly 6determined in accordance 7ith section D.D6b:64: :,
more than %. percent o0 the capital interest, or pro0its interest, in
such partnership at the time o0 the inoluntary conersion, and
6C: any other taxpayer i0, 7ith respect to property 7hich is
inoluntarily conerted during the taxable year, the aggregate o0
the amount o0 reali8ed gain on such property on 7hich there is
reali8ed gain exceeds F#..,...5
In the case o0 a partnership, subparagraph 6C: shall apply 7ith respect to
the partnership and 7ith respect to each partner5 ! similar rule shall apply
in the case o0 an S corporation and its shareholders5
(3) Related person.
For purposes o0 this subsection , a person is related to another person i0
the person bears a relationship to the other person described in section
?&D6b: or D.D6b:6#: 5
(/) ,ales or e+c"an#es to implement micro&ave relocation policy.
(1) In #eneral.
For purposes o0 this subtitle, i0 a taxpayer elects the application o0 this
subsection to a 9uali0ied sale or exchange, such sale or exchange shall be
treated as an inoluntary conersion to 7hich this section applies5
(2) 0ualiied sale or e+c"an#e.
For purposes o0 paragraph 6#:, the term @9uali0ied sale or exchangeA
means a sale or exchange be0ore Ganuary #, ?..., 7hich is certi0ied by
the Federal Communications Commission as haing been made by a
taxpayer in connection 7ith the relocation o0 the taxpayer 0rom the #B%.$
#EE.M38 spectrum by reason o0 the Federal Communications
CommissionCs reallocation o0 that spectrum 0or use 0or personal
communications serices5 The Commission shall transmit copies o0
certi0ications under this paragraph to the Secretary5
(%) ,ales or e+c"an#es under certain "a1ard miti#ation pro#rams.
For purposes o0 this subtitle, i0 property is sold or other7ise trans0erred to the
Federal /oernment, a State or local goernment, or an Indian tribal goernment
to implement ha8ard mitigation under the Robert T5 Sta00ord ,isaster Relie0 and
+mergency !ssistance !ct 6as in e00ect on the date o0 the enactment o0 this
subsection : or the (ational Flood Insurance !ct 6as in e00ect on such date:, such
sale or trans0er shall be treated as an inoluntary conersion to 7hich this section
applies5
(l) Cross reerences.
(1) For determination o0 the period 0or 7hich the taxpayer has held
property inoluntarily conerted, see section #??4 5
(2) For treatment o0 gains 0rom inoluntary conersions as capital gains in
certain cases, see section #?4#6a: 5
(3) For exclusion 0rom gross income o0 gain 0rom inoluntary conersion
o0 principal residence, see section #?# 5
H ?..D ThomsonIRI!5 !ll rights resered5