Is a condo deconversion an involuntary conversion under section 1033?

Section 1033 names its triggers, and a vote by private owners is not among them

The statute's opening clause is the whole test. Section 1033(a) reaches property that, "as a result of" one of the listed causes, "is compulsorily or involuntarily converted". Those words describe the result of a listed cause; they do not create a category for any sale a taxpayer did not want.

Reg. section 1.1033(a)-1(a) repeats the list: destruction, theft, seizure, "the requisition or condemnation of property, or the threat or imminence of requisition or condemnation of property". Requisition and condemnation are acts of a body holding the power of eminent domain. An investor who buys a building after the owners vote holds no such power.

The confusion is understandable. Illinois measures a dissenter's relocation costs by borrowing a federal statute written for condemnations, and being sold out feels like a taking. The Code does not work by feel: if the cause is not on the list, section 1033 does not apply, and condemnation award replacement rules are for a different reader.

The Illinois and Florida statutes describe a sale by the owners, not a taking from them

765 ILCS 605/15(a) lets 75% of the owners of a building with four or more units "elect to sell the property", binds every owner to that election, and pays an objecting owner "from the proceeds of such sale". The buyer is whoever the board contracts with, and no public body is involved.

Florida's section 718.117 is longer but no different in kind. Eighty percent of the voting interests approve a plan of termination, title vests in a termination trustee, and under subsection (14) the trustee "on behalf of the unit owners, may contract for the sale of real property being terminated". Under subsection (13) the trustee is the association itself unless the plan names someone else. The owners sell through an agent they appointed; the state takes nothing.

A city redevelopment agency could, in theory, be the bulk buyer. Then the question is whether the sale was made under a genuine threat of condemnation by a body able to carry it out, the ordinary inquiry covered on eminent domain sellers. No ruling applying that test to a condominium-act sale was found, so treat a public buyer as a question for tax counsel.

Why the label matters: two or three years and no intermediary, against 45 and 180 days with one

Under section 1033(a)(2)(B) a taxpayer whose property is converted into money may replace it within two years after the close of the first taxable year in which any gain is realized, and subsection (g)(4) makes that three years for condemned business or investment real property. The taxpayer may hold the cash meanwhile; there is no identification deadline and no intermediary.

Section 1031(a)(3) gives 45 days to identify and 180 days to close, measured from the transfer, and Reg. section 1.1031(k)-1(f) ends the exchange if the taxpayer actually or constructively receives the money first. An owner who assumes the longer window, takes the association's cheque and starts shopping has already lost the deferral.

So the cost of guessing wrong is total. Treat the deconversion as a section 1031 sale from the day the vote passes: retain the intermediary, serve the assignment notice on the board or trustee and the buyer, and plan identification around the closing date. When the 45 days start in a bulk condo sale fixes the date, and whether a no vote changes anything covers dissenters.

Worked contrast: the same $300,000 gain under the two sections

Hypothetical, round figures. A unit held for rent is sold in a deconversion for $500,000 against an adjusted basis of $200,000, a $300,000 gain. If this were a condemnation, the owner could bank the $500,000, buy similar property any time through the end of the third year after the year of sale, elect nonrecognition on the return and owe nothing now.

Because it is a deconversion, the $500,000 must go from the closing to a qualified intermediary, replacement property must be named in writing within 45 days and acquired within 180, and it must cost at least $500,000 with any loan payoff matched by new debt or cash. Done that way the $300,000 gain is deferred just as fully; done the section 1033 way, it is taxed in the year of sale. Compare both paths with your CPA before the closing date is set.

What a forced seller should do instead of waiting for a longer clock, and the open question about trusts

Decide first whether the unit qualifies at all: it must have been held for investment, and a unit that was your home belongs under the residence exclusion rather than either section. Then run the section 1031 process on the association's timetable and start the replacement search before the bulk closing.

For a section 1031 exchange, a Delaware statutory trust interest can be identified and closed quickly; Rev. Rul. 2004-86 treats it as an undivided interest in the trust's real property when the trustee's powers are limited as the ruling sets out. It is illiquid, carries no control and can lose principal; the traditional DST page sets out the structure.

Section 1033 is different. If your sale ever does qualify, for example a genuine sale under threat of condemnation to a public buyer, no authority was found on whether a trust interest counts as replacement property under section 1033(g). That question is open; put it to tax counsel before relying on it.