1033 Exchange for Rental Property: Fire, Condemnation, Deadlines

The event decides the test and the clock

Most pages about the “1033 exchange” describe one rule. The Code has several, and they attach to the way the property was lost. Our map, each cell tied to its text:

The sentence in the regulation that matters most for a landlord is the one that limits the special condemnation rule. Treas. Reg. 1.1033(g)-1(a) says that for this purpose “disposition means the seizure, requisition, or condemnation (but not destruction) of the converted property, or the sale or exchange of such property under threat or imminence of seizure, requisition, or condemnation.” A burned building is a destruction. Guides that promise a rental owner “like-kind” replacement and 3 years after a fire are describing the condemnation rule (our reading of the section and the regulation).

The calendar: the year gain is first realized sets the deadline

Both the statute and the regulation count from the end of a tax year, not from the day of the fire or the taking. The period begins on the date of the disposition, or the earliest date of the threat or imminence of condemnation, “whichever is the earlier”, and ends 2 years after the close of the first taxable year in which any part of the gain is realized (26 U.S.C. 1033(a)(2)(B)). Gain is realized when insurance or an award exceeds adjusted basis, and for a cash-basis taxpayer that is when the payments are received: Publication 544 says that if the condemning authority deposits money with the court, “you realize gain when you withdraw (or have the right to withdraw) amounts that are more than your basis,” even for partial or advance payments.

Here is the deadline for a calendar-year taxpayer, assuming the first payment above basis arrives in the year shown (our arithmetic from the statute):

Publication 547 gives the same logic in its own example: a calendar-year taxpayer whose insurer paid in 2026 “has until December 31, 2028, to replace the property”, and in its hurricane example (a home destroyed in September 2025, gain first realized in 2025) the base deadline is December 31, 2027, while “If your home had been in a federally declared disaster area, you would have until December 31, 2029, to replace the property.” For a landlord with a Q4 2026 loss this is the practical point: the month the first check above basis arrives can add a year or not (our reading). The clock also starts early for condemnation: replacement property bought after a threat of condemnation but before the taking counts if still held on the day of the taking, and “Property you acquire before there is a threat of condemnation does not qualify as replacement property acquired within the replacement period” (Publication 544).

Condemnation: what “like kind” buys, and where it stops

Section 1033(g)(1) says that for real property held for productive use in a trade or business or for investment (not stock in trade or other property held primarily for sale) that is seized, requisitioned or condemned, “property of a like kind to be held either for productive use in trade or business or for investment shall be treated as property similar or related in service or use.” The regulation sends the reader to the like-kind principles of the 1031 regulations. Publication 544 says, in its like-kind discussion, that “An exchange of city property for farm property or improved property for unimproved property is a like-kind exchange”, and, unlike a 1031 exchange, “Foreign and U.S. real property can still be considered like-kind property under the rules for replacing condemned property.” Limits that sit in the same primary texts:

• Not for stock. The like-kind and 3-year rules do not apply to buying a controlling interest in a corporation that owns the replacement property (1033(g)(2); Pub. 544).
• The lender’s share is your money. Treas. Reg. 1.1033(a)-2(c)(11) says that when the government pays a mortgagee out of an award “the amount of such award shall be considered as a part of the amount realized”, and its example treats a $60,000 award to the owner plus $50,000 to the lender as $110,000 realized. Replacement cost is measured against the full amount.
• Special assessments are the exception. Amounts the government retains for benefits assessments against the remaining parcel come off the award (Treas. Reg. 1.1033(a)-2(c)(10)), as do the expenses of getting the award (Pub. 544).
• Part taken, part kept. Severance damages and the cost of restoring the remaining part to its former usefulness have their own treatment in Publication 544, including treating restoration cost as replacement cost.
• Interest and relocation payments are not award. Interest for delayed payment is ordinary income, and relocation payments under federal or federally assisted programs are not part of the award (Pub. 544).

Fire, storm and flood: the narrower test

For a destroyed rental there is no like-kind safe harbor. The test is the functional one in Publication 547: “If you are an owner-investor, ‘similar or related in service or use’ means that any replacement property must have a similar relationship of services or uses to you as the property it replaces.” The publication lists three questions: whether the properties are of similar service to you, the nature of the business risks, and what they demand of you in management, services and relations with tenants. Its examples show how that plays out. A tornado destroyed a building rented to a manufacturer and a new building, rented as a warehouse, qualified because it was also rental property with similar management, tenant services and risks. And a rental home destroyed by fire, insured for $67,000 against a $62,000 basis, was replaced by a $110,000 rental home, leaving a $105,000 basis (Publication 547, 2025).

Two provisions change the picture for a federally declared disaster. First, section 1033(h)(2): “tangible property of a type held for productive use in a trade or business shall be treated for purposes of subsection (a) as property similar or related in service or use to the property so converted.” The Instructions for Form 4684 describe it as any tangible replacement property held for use in a trade or business, and Publication 547 adds that “The replacement property doesn’t have to be located in the federally declared disaster area.” Second, “federally declared disaster” and “disaster area” take the meaning in section 165(i)(5) (1033(h)(3)). What it does not do, on the text, is lengthen a landlord’s 2 years: subparagraph (h)(1)(B) is part of the principal-residence paragraph (our reading).

Other rules that affect a fire or storm claim:

• Rent-loss insurance is income. “The proceeds of a use and occupancy insurance contract, which by its terms insured against actual loss sustained of net profits in the business, are not proceeds of an involuntary conversion but are income in the same manner that the profits for which they are substituted would have been” (Treas. Reg. 1.1033(a)-2(c)(8)).
• Debt paydown and land-to-building. The regulation lists as not similar the paying down of debt with conversion proceeds, and investing the proceeds of unimproved real estate taken in condemnation in improved real estate (Treas. Reg. 1.1033(a)-2(c)(9)). Publication 544 now treats improved for unimproved property as like kind for condemnation, so the second item is, in our reading, superseded there by section 1033(g) and still relevant to the functional test for other losses.
• Damaged, not destroyed. For a gain on damaged property, Publication 547 says the gain can be postponed “if you spend the reimbursement to restore the property.”
• Spending more than you recovered. An amount spent on replacement “in excess of the recovery for loss, represents a capital expenditure and is not a deductible loss” (Treas. Reg. 1.1033(a)-2(c)(12)).

The election, the statement and the amended return

When the replacement is of similar property and no money is kept, nonrecognition is automatic: the regulation says “Such nonrecognition of gain is mandatory.” The election matters when the proceeds are money. The regulation says an election to recognize gain only to the extent proceeds exceed the cost of replacement is made by including the gain in gross income for the year “only to such extent”, and adds that if the return is filed after the replacement period has ended, or no election is wanted, the gain is included in the regular manner. The same paragraph says “A failure to so include such gain in gross income in the regular manner shall be deemed to be an election”. The publications describe the steps:

Related rules: replacement bought from a related person defeats the election for C corporations, for partnerships with more than 50% C-corporation ownership, and for anyone else whose realized gain on converted property in the year exceeds $100,000 (1033(i)(2)); property acquired by gift or inheritance does not qualify (Pub. 544; the regulation uses a gift as its example); advance payment to a contractor counts only if the building is finished before the period ends (Pub. 544); and the IRS can assess a deficiency on the gain until 3 years after it is notified of the replacement or of the decision not to replace (1033(a)(2)(C)(i)). You do not have to spend the same money: Publication 544 says “You do not have to use the actual funds from the condemnation award to acquire the replacement property.”

Extensions exist, but narrowly. The statute lets the Secretary designate a later date on application (1033(a)(2)(B)(ii)). Publication 544 says extensions are “usually limited to 1 year,” and that “The high market value or scarcity of replacement property isn't sufficient grounds for granting an extension”; construction that clearly cannot finish in time can be. The IRS page “Involuntary conversion: Get more time to replace property” (last reviewed December 17, 2025) gives the same instruction: ask before the period ends if possible, to the Detroit address or fax number printed there.

The numbers: recognized gain and replacement basis

Two hypothetical rentals, our arithmetic from 1033(a)(2)(A) and (b)(2). Section 1033(a)(2)(A) recognizes gain “only to the extent that the amount realized upon such conversion (regardless of whether such amount is received in one or more taxable years) exceeds the cost of such other property”; section 1033(b)(2) sets the replacement basis at “the cost of such property decreased in the amount of the gain not so recognized.”

Example 1, a fire. The building cost $300,000 and $90,000 of depreciation was allowed, so adjusted basis is $210,000. The insurer pays $380,000 for the building in 2026. Gain is $380,000 minus $210,000, or $170,000.

Example 2, a condemnation. A parcel with a $400,000 adjusted basis is condemned. The net award is $900,000, of which $300,000 went directly to the lender; all $900,000 is amount realized (Treas. Reg. 1.1033(a)-2(c)(11)). Gain is $500,000.

In both examples the postponed gain does not disappear; it is the reduction in basis. A later taxable sale of the replacement brings it back (our reading), and the statute’s cross reference in 1033(k)(1) sends the holding period of the old property to section 1223.

Depreciation, recapture and the insurance check

The depreciation already taken is part of why the gain exists, because adjusted basis is cost minus depreciation allowed or allowable. Publication 544 states the interplay directly: an involuntary conversion into similar or related property “will generally not result in your having to report ordinary income from depreciation unless money or property other than like-kind, similar, or related property is also received in the transaction. However, section 1245 recapture may occur when property that is not section 1245 property is received as part of a like-kind exchange or involuntary conversion even if no gain would otherwise be recognized.” For a landlord that has two consequences (our reading):

• The recognized part is where tax arises. In Example 1 the $30,000 recognized is the only gain taxed in 2026; because $90,000 of depreciation was taken, it sits inside the depreciation, so under the rules in our guide to depreciation recapture on a rental property it would be unrecaptured section 1250 gain, with its 25% ceiling, rather than gain at the lower long-term rates.
• Equipment is separate. Appliances, carpet and components treated as section 1245 property follow a different rule: for depreciable personal property in an involuntary conversion Publication 544 limits the ordinary income to the sum of the gain included in income and the fair market value of replacement property other than depreciable personal property, with a machinery example. The Instructions for Form 4684 tell a filer with a casualty gain from certain property held more than 1 year to complete Form 4797, Part III, “instead of Form 4684, line 34” when recapture applies.

Reporting runs through two forms. Form 4684, Section B, figures gain or loss for business and income-producing property, and Publication 544 says gain or loss from a condemnation of business property goes on Form 4797, with postponed gain left out. For a destroyed or stolen rental, Publication 547 gives the loss as your adjusted basis, minus salvage value, minus insurance or other reimbursement you receive or expect to receive, which is the reason a loss cannot be postponed: there is nothing to postpone. For section 1231 netting, the Form 4797 instructions say that if recognized casualty losses exceed recognized gains from the same conversions they are left out of the net section 1231 computation.

1033 versus 1031 in one paragraph

A 1031 exchange is a voluntary swap of real property held for business or investment and, when deferred, it requires identifying the replacement within 45 days and receiving it by the earlier of the 180th day or the tax return due date (Publication 544 describes both). Section 1033 starts with a loss you did not choose; the replacement period is measured in years from the end of the tax year of the gain, and in the fire case the test is functional similarity, not like kind. Both reduce the replacement basis by the deferred gain. For the 1031 side, see our 1031 exchange rules guide; for how an unpostponed gain stacks with other gains, see capital gains tax on real estate.

The 2026 disaster hook: what the IRS has actually published

For readers with a Q4 2026 loss, the primary sources say little that is new for landlords, and we think that is worth stating plainly. IRS Notice 2026-54 gives an extension of the section 1033(e) replacement period “for livestock sold on account of drought in specified counties”, with an appendix of counties for the 12-month period ending August 31, 2026. It does not apply to rental buildings. We found no 2026 notice that changes the replacement clock for a destroyed or condemned rental, and Publication 547 (2025) still gives 2 years for destruction and refers condemnation to Publication 544. Publication 547 also records two laws on disaster deadlines (the Filing Relief for Natural Disasters Act, for disasters declared after July 24, 2025, and the Disaster Related Extension of Deadlines Act, enacted December 26, 2025); neither text as summarized there says it lengthens the section 1033 replacement period, and we did not verify whether a given disaster postponement affects that period. State income tax conformity to section 1033 was not verified for this page.

For the numbers behind how many filers use these rules, we looked for an IRS Statistics of Income table on Form 4797 involuntary conversions or casualty gains and did not find a published table we could cite; there is none on this page.

What a reader can do with this

• Write down the cause. Fire or storm, a declared disaster, a condemnation action, or a threat letter each lead to a different test and clock in the tables above.
• Date the first payment above basis. It sets the last day. Partial and advance payments can start the period.
• Collect the figures the statement needs: adjusted basis, depreciation allowed, insurance or award received, who got paid directly (a lender’s share counts), and the cost of any restoration or replacement.
• Check who owns the property. An entity owner makes the election itself, and the related-party limit is tested per entity and per owner above $100,000 of gain.
• Ask for an extension before the period ends, not after, if construction clearly will not finish in time.

This is a decision with a deadline and a permanent effect on basis, and the professionals who can read a closing statement and the return are a CPA or a tax attorney. An adviser match is not a substitute for either; the box below is a referral to financial advisers, for readers who also want to look at the portfolio side of a large gain.

FAQ

Sources, read and saved on October 13, 2026: 26 U.S.C. 1033 (United States Code, 2024 edition, GPO via govinfo.gov); Treas. Reg. 1.1033(a)-1, 1.1033(a)-2, 1.1033(b)-1, 1.1033(g)-1 and 1.1033(h)-1 (Electronic Code of Federal Regulations, version of October 1, 2026); IRS Publication 544 (2025), Sales and Other Dispositions of Assets; IRS Publication 547 (2025), Casualties, Disasters, and Thefts; Instructions for Form 4684 (2025) and Instructions for Form 4797 (2025); the IRS page “Involuntary conversion: Get more time to replace property” (last reviewed December 17, 2025); and IRS Notice 2026-54. The IRS has not yet published the 2026 versions of these publications, so we read the 2025 editions. The properties, dates and amounts in the worked examples are hypothetical and every recognized-gain, postponed-gain, basis and deadline figure is our arithmetic. This is analysis of public documents, not investment, legal or tax advice.