[ IRS · Rev. Proc. · Extension Request ]  ·  [ Replacement Period · Extension Procedure ]

The IRS has authority to extend the § 1033 replacement period beyond the statutory window upon request. Extensions are granted for good cause — supply chain issues, permitting delays, litigation over replacement property, or other circumstances outside the taxpayer's control have all been recognized. The key is that the request must be made before the deadline expires.

The AICPA has urged the IRS to establish a more streamlined procedure for processing these requests, particularly for large commercial transactions where replacement timelines are genuinely unpredictable. Currently, multiple extensions of the same replacement period are not permitted — meaning once an extension is granted, that is the final deadline.

Practitioners should calendar the replacement deadline at first contact and initiate extension requests well in advance if the client's replacement acquisition is in doubt. Waiting until after the deadline requires a significantly stronger showing and leaves the client exposed to full gain recognition if the request is denied.

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[ IRC § 1033(g) ]  ·  [ Continued from May · § 1033 Series ]

As we introduced in May, the general § 1033 replacement standard requires property that is "similar or related in service or use" — a stricter test than most clients expect. A client whose retail strip center is condemned cannot simply replace it with a warehouse under the general rule because the functional use differs.

§ 1033(g) changes this entirely for business and investment real estate. If the condemned property was held for productive use in a trade or business or for investment, the replacement standard drops to the same like-kind standard used in § 1031 exchanges. That means any real estate held for business or investment qualifies — raw land, commercial property, multifamily residential, industrial, and even out-of-state real estate.

For large condemnation clients this is transformative. A client whose industrial facility is taken for a highway project is not limited to replacing it with another industrial facility. Under § 1033(g) they can replace it with an apartment complex, a commercial office building, or undeveloped land held for investment — whichever best fits their financial situation at the time.

The caveat: § 1033(g) only applies when the condemned property qualifies as real property held for business or investment use. Primary residences and personal-use property do not qualify for the broader like-kind standard and remain subject to the stricter similar-use test.

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[ § 1245 · § 1250 · Recapture ]  ·  [ Common Misconception ]

One of the most consequential misunderstandings in condemnation tax planning: a successful § 1033 exchange does not eliminate depreciation recapture — it defers it. The basis of the replacement property is reduced by the deferred gain, which means the recapture follows the asset forward into the replacement property.

§ 1245 recapture applies to personal property and equipment. It is ordinary income, computed before any § 1231 gain or loss calculation. If condemnation proceeds are allocable to § 1245 assets — common in pipeline easements involving fencing, wells, or irrigation equipment — that recapture is recognized as ordinary income in the year of receipt, even if the remainder of the gain is deferred under § 1033. This is the portion that cannot be deferred regardless of how well the exchange is structured.

§ 1250 recapture applies to depreciated real property — specifically buildings and structural components. For commercial property, the accumulated depreciation on improvements drives significant recapture exposure at the 25% unrecaptured § 1250 gain rate. This rate is not reduced by § 1033 deferral.

For clients receiving large awards on commercial or income-producing properties, the depreciation recapture calculation should happen before any discussion of replacement property — because it determines the non-deferrable portion of the tax event that your client will owe regardless of what they do next.

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[ Severance Damages · Partial Taking ]  ·  [ IRS Pub. 544 · Rev. Rul. 83-49 ]

When only part of a property is condemned, severance damages compensate the owner for the diminished value of the retained remainder. From a tax standpoint, they are treated as proceeds from an involuntary conversion of the remainder — meaning they first reduce the owner's adjusted basis in the retained property. This is a non-taxable event as long as the severance damages do not exceed the basis.

For clients with low-basis retained property, maximizing the allocation of the total award to severance damages absorbs more of the cash event against basis rather than triggering taxable gain on the taken parcel. The condemning authority's total payment is the same regardless of how it is characterized — but the tax difference for your client can be substantial.

The IRS requires documentation. The allocation must be specified in the closing papers — it cannot be inferred or reconstructed after the fact. Revenue Ruling 83-49 confirms that severance damages deferred under § 1033 can be reinvested in like-kind property beyond just the retained parcel, expanding the options for clients who do not wish to restore the remainder.

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