Which of the following qualify or qualifies as replacement property under § 1033
ID: 2457282 • Letter: W
Question
Which of the following qualify or qualifies as replacement property under § 1033 (nonrecognition of gain from an involuntary conversion)? (1) An office building occupied by the taxpayer is destroyed by a fire. The building is to be replaced with a warehouse, which is to be used to store the taxpayer's inventory. (2) A shopping center leased to various retail tenants is destroyed by a tornado. The shopping center is to be replaced with a warehouse, which is to be leased to various tenants. (3) An office building occupied by the taxpayer is condemned. The building is to be replaced by a warehouse, which is to be leased to various tenants. (Points : 2)
1
2
3
1 and 3
2 and 3
1
2
3
1 and 3
2 and 3
Explanation / Answer
As per Section 1033 qualified replacement property is a property Similar or Related in service or use. “Similar or Related in service or use” as per the Tax Court needs to satisfy
Keeping this in mind let us see each of the 3 options whether qualifies as replacement property under sec 1033.
(1) An office building occupied by the taxpayer is destroyed by a fire. The building is to be replaced with a warehouse, which is to be used to store the taxpayer's inventory.
The purpose of Office building and warehouse building are different. Although Warehouse can be used as temporary facility until a replacement property is purchased, it cannot be considered as replacement property. It does not satisfy the condition of Similar or Related in service or use.
(2) A shopping center leased to various retail tenants is destroyed by a tornado. The shopping center is to be replaced with a warehouse, which is to be leased to various tenants.
One of the examples given in the section for replacement property is “Replacement of destroyed facilities on leased land in one location by construction of similar facilities on leased land in another location.”
Here both shopping center and warehouse are used for lease to tenants. So it is a similar use. Also there is a condition specified by the tax court as said above “Character of the investment should not be changed (although replacement property need not duplicate the converted property)”
Based upon these explanations, this can be considered as replacement property under Sec 1033
(3) An office building occupied by the taxpayer is condemned. The building is to be replaced by a warehouse, which is to be leased to various tenants.
The purpose of Office building and warehouse building are different. Although Warehouse can be used as temporary facility until a replacement property is purchased, it cannot be considered as replacement property. It does not satisfy the condition of Similar or Related in service or use.
Hence the answer is 2
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