When your real estate is taken by condemnation or destroyed by a casualty, §1033 of the Internal Revenue Code lets you reinvest the insurance or award proceeds and defer the gain. Because the replacement-property rules in §1033 are not identical to the §1031 “like-kind” rules, investors often ask whether fractional structures such as Delaware Statutory Trusts (DSTs), Tenants-in-Common (TICs), or even UPREIT units will work. Here’s a plain-English roadmap.
1. Side-by-Side: 1033 vs 1031 Replacement Tests
| §1033 Exchange | §1031 Exchange | |
| When you can use it | After an involuntary conversion—condemnation, eminent-domain sale, casualty, theft, or seizure | After a voluntary sale or exchange |
| Primary tax goal | Defer capital-gain and depreciation-recapture taxes on the award proceeds | Defer capital-gain and depreciation-recapture taxes on the sale proceeds |
| Replacement-property standard | • Owner-user real estate: must be “similar or related in service or use.” • Investment or business real estate taken by condemnation (§1033(g)): any “like-kind” real property, mirroring the broad real-estate definition under §1031. |
Any U.S. real property “held for investment or productive use in a trade or business.” Personal residences and dealer inventory excluded. |
| Who holds the cash | Taxpayer can keep or bank the proceeds; a Qualified Intermediary (QI) is not required. | Proceeds must stay with an independent QI between sale and purchase. |
| Time allowed to reinvest | Generally 2 years after the close of the first tax year in which any gain is realized; 3 years if condemned investment real estate. | 45 days to identify; 180 days to close. |
| Can you “trade up” again? | Yes. 1033 replacement property can later be sold in a §1031 (or a new §1033) exchange. | Yes—indefinite “swap-till-you-drop.” |
2. What the IRS WILL Accept as 1033 Replacement Property
Because §1033 refers back to the real property test, the key question is whether your ownership interest is treated as direct real estate in the eyes of the IRS. Today there are exactly two fractional, securitized formats that meet that test:
| Structure | Why It Qualifies for §1033 & §1031 |
| Delaware Statutory Trust (DST) | Rev. Rul. 2004-86 says a properly structured DST is not a partnership; investors are treated as owning an undivided interest in the trust’s real estate. |
| Tenants-in-Common (TIC) | Rev. Proc. 2002-22 offers a safe harbor under which each co-owner is deemed to hold a direct deeded interest. |
Both structures let you purchase a fractional share of institutional-grade real estate without ruining deferral under either code section.
3. What the IRS Will NOT Accept for §1033 Deferral
| Ownership Form | Why It Fails the §1033 Test |
| LLC or Limited-Partnership (LP) interests | Units are personal-property partnership interests—even if 100 % of the entity’s assets are real estate. They are treated as securities, not real property. |
| Public or private REIT shares | Stock is always personal property. Same result if you buy REIT shares directly on an exchange or in a private offering. |
| UPREIT Operating-Partnership (OP) units | OP units are considered partnership interests; they do not constitute direct ownership of real estate at the moment you acquire them. |
4. Can §1033 Proceeds End Up in an UPREIT—Ever?
Not directly. If you move award proceeds straight into an UPREIT and receive OP units, you will trigger current tax because the replacement-property requirement is unmet.
But there is a two-step path:
- Replace first with real property that qualifies—e.g., a DST or TIC structured for a future 721 UPREIT exit.
- After a holding period (often 12–24 months to document investment intent), the sponsor may contribute that property to an UPREIT in a §721 exchange. Your DST or TIC interest converts to OP units without triggering the gain deferred under §1033. Tax is recognized later only if you exchange those OP units for REIT shares or the REIT sells assets and distributes taxable gain.
5. Practical Take-Aways for 1033 Investors
- Replacement property must look like bricks and dirt in the tax code’s eyes. DSTs and TICs pass that test; partnership or REIT securities do not.
- You control the cash. Because a QI isn’t mandatory, trace the proceeds in a segregated account and document all acquisition dates and costs.
- You have more time—but don’t wait too long. Three years vanish quickly when you’re evaluating fractional offerings that may fill within days.
- Stacking strategies is legal. A proper 1033 replacement can later roll into a 1031 or even a 721 UPREIT, extending or re-starting the deferral clock.
Need Securitized 1033 or 1031 Options?
Orvida Investment Advisors, LLC specializes in matching involuntary-conversion proceeds with vetted DST and TIC offerings—and, when appropriate, structuring future UPREIT exits. For more detailed projections or a second opinion on securitized 1031 and 1033 exchange options that align with your long-term real estate strategy, reach out to Orvida Investment Advisors’ exchange advisory team.
