Updated September 28, 2026
A fire takes half of your building in Highland Park. Eight months later, the insurance check arrives. Nobody at the insurance company mentions that the check just started a tax clock — a different clock than the 1031 clock your CPA has probably already explained to you. That clock is IRC Section 1033, and it exists for exactly one situation: you didn't choose to sell. The property was taken from you, by fire, by theft, or by the government, and the tax code gives you a path to defer gain on the money you're forced to reinvest.
A 1031 exchange is for a voluntary sale — you list the building, find a buyer, close on your own timeline. A 1033 exchange covers an involuntary conversion: the building is destroyed by fire or another casualty, condemned by eminent domain, or seized through governmental action. In both cases the underlying idea is the same — defer the gain by reinvesting proceeds into replacement property — but the trigger and several of the mechanics differ.
Casualty or destruction. A fire, an earthquake, or another casualty destroys or substantially damages the building. The insurance settlement, not a buyer's check, is the proceeds you're reinvesting.
Eminent domain and condemnation. A government agency — Metro, Caltrans, the city — takes all or part of your parcel and pays a condemnation award instead of letting you negotiate a market sale. The award is the proceeds. A partial taking raises its own set of questions about the building that remains, which is its own conversation with your attorney.
You can hold the money yourself. A 1031 exchange requires a qualified intermediary — the seller is not permitted to touch the proceeds between closing and purchase of the replacement. A 1033 exchange doesn't carry that same requirement. You can receive the insurance or condemnation payment directly and still qualify, provided you reinvest it in qualifying replacement property within the applicable period.
The replacement standard for real property is broad. For real property held for investment that is condemned, the tax code allows the same "like-kind" standard used in a 1031, which is more forgiving than the narrower "similar or related in service or use" test that applies to casualty losses on other kinds of property. In practice, that means condemned investment real estate can usually be replaced with other investment real estate.
The timelines are not the 1031 timelines. The deadlines that govern how long you have to reinvest are set by statute and depend on which trigger applies. Don't assume the 45-day/180-day clock from a standard 1031 carries over — it doesn't. Confirm the actual deadline for your situation with your CPA or tax attorney before you plan around a date you read somewhere.
Most LA multifamily owners have heard of a 1031. Almost none have heard of a 1033, because almost none expect a fire or a government taking. When it happens, the instinct is to treat the check like ordinary income, or to assume the 1031 rules apply wholesale. Neither is right, and that gap is exactly where an involuntary conversion turns into an avoidable tax bill.
If you're rebuilding rather than replacing — repairing the same building on the same lot — the analysis is different again, and it turns on what portion of the proceeds actually gets reinvested and how. This is not a do-it-yourself calculation. Bring your CPA or a tax attorney in before you spend or commit the funds, not after.
A 1033 situation is stressful enough without also managing a sale. If you're weighing selling the remaining property outright instead of rebuilding, the mechanics of a normal LA multifamily disposition are covered in how to sell an apartment building in Los Angeles. If a voluntary 1031 is also part of the picture for other assets, the deadlines and traps differ from what's described here — see the complete 1031 exchange guide. If the casualty was fire-related, what LA's insurance crisis means for sellers covers the coverage side.
A 1033 exchange exists because the tax code recognizes that losing a building to fire or a government taking isn't the same as choosing to sell it. The deferral opportunity is real, the proceeds rules are more flexible than a 1031's, and the replacement standard for real property is workable. What isn't flexible is the deadline, and that's precisely the detail owners get wrong when they're already dealing with a fire or a taking and have every reason to be distracted.
Is a 1033 exchange the same as a 1031 exchange?
No. Both defer gain through reinvestment, but a 1031 is for a voluntary sale and requires a qualified intermediary; a 1033 is for an involuntary conversion — casualty, theft, or condemnation — and doesn't carry that same intermediary requirement.
Do I have to use a qualified intermediary for a 1033 exchange?
No, not in the way a 1031 requires. You can generally receive the insurance settlement or condemnation award directly and still qualify, provided you reinvest within the applicable deadline.
What happens if I don't reinvest all the insurance proceeds?
Any portion not reinvested in qualifying replacement property is generally taxable. How much of a settlement or award must be reinvested, and by when, depends on your specific facts — confirm with your CPA before deciding what to do with the funds.
Michael Sterman is Senior Managing Director Investments at Marcus & Millichap.
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