The short answer
It can still qualify. Section 1033 covers property sold under the “threat or imminence” of condemnation, not only property taken through a filed lawsuit. A negotiated sale is not automatically a regular sale.
What matters is whether you had a real reason to believe condemnation would follow if you did not sell, and whether you can show it. The facts decide, so confirm them with your tax advisor and attorney before you sign anything.
This page is educational and not advice for your situation.
How do you know if you qualify?
Four questions tend to sit at the center of a negotiated sale.
- Can the buyer condemn?The authority has the legal power of eminent domain.
- Has the government said so?An authorized government representative or public official has indicated the property will be acquired.
- Is condemnation realistic?You have reasonable grounds to believe condemnation would follow if you did not sell.
- Is that why you sold?You sold to avoid condemnation, not as a purely voluntary deal.
Based on how the IRS has described the test in its guidance. Facts and circumstances apply.
Negotiating a deal? How to protect your position
A negotiated sale can still receive Section 1033 treatment, but the groundwork matters. Here is what usually helps, before and after you close.
Before you sign
- Get the authority’s intent to acquire in writing. If you heard it verbally or in the news, ask for written confirmation.
- Keep maps, notices, offers, and correspondence.
- Make sure the contract and closing documents show who the buyer is.
- Talk to your tax advisor and attorney first.
After you close
- Note the date the threat began. The replacement period can start then.
- Reinvest within the replacement period in qualifying replacement property.
- Report the details, including your replacement, on your tax return for the year the gain is realized.
Two situations, side by side
An illustration of how the facts can point in different directions.
More likely to fit
A county sends notices, orders appraisals, and says it will use eminent domain if talks fail. The owner signs a purchase agreement before any condemnation petition is filed.
Harder to support
A city mentions it may someday expand a park, but has taken no official action. The owner approaches the city and sells years before any acquisition program exists.
Every situation is different, and the outcome depends on the full set of facts.
Three things worth knowing
- The buyer need not be the governmentThe IRS has treated a sale to someone other than the condemning authority as qualifying when the owner had reasonable grounds to believe condemnation would follow.
- The clock can start earlyThe replacement period begins at the earlier of the sale or the start of the threat. It generally ends two years after the close of the first tax year in which gain is realized, or three years for condemned business or investment real property.
- Deferral, not eliminationTo defer all of the gain, you generally need to reinvest the full proceeds in qualifying replacement property. The tax is postponed, not forgiven.
Watch the 2-minute version
The key points on negotiated sales and Section 1033, before you sign anything.
Papers worth keeping from day one
A clear paper trail can matter. Ask your attorney what else applies in your state.
- Written statements from an official that the property will be acquired
- Resolutions, maps, or project plans that identify your property
- Written notices or offers from the authority
- Anything showing the authority has eminent domain power
- Correspondence saying condemnation would follow if talks fail
- Closing documents naming the buyer
Common questions
Does a condemnation lawsuit have to be filed first?
No. The statute and the regulations reach a sale made under the threat or imminence of condemnation. But the facts decide, so confirm how they apply to you.
How do I show that condemnation was a real threat?
Generally, the question is whether an authorized government representative indicated the property would be acquired, and whether you had reasonable grounds to believe condemnation would follow if you did not sell. Written confirmation can help, because the IRS may ask for it.
Does the buyer have to be the government?
Not necessarily. The IRS has treated a sale to someone other than the condemning authority as qualifying when the owner had reasonable grounds to believe condemnation would follow. Confirm the details with your tax advisor and attorney.
What if I approached the government first?
The test centers on your reasonable belief that condemnation would follow, and what you can show about it. Who started the conversation is part of the history your advisors will look at, so keep a clear record.
When does the replacement deadline start?
It can begin as early as the threat of condemnation. It generally ends two years after the close of the first tax year in which any gain is realized, or three years for condemned business or investment real property. Confirm your dates early.
Negotiating with an authority? Talk before you sign
If a government authority has approached you about your property, a 15-minute conversation can help you understand the questions to ask, alongside your tax advisor and attorney, before any agreement is signed.
Important disclosures
This material is general in nature and is not tax or legal advice. Section 1033 rules are complex, and eligibility and deadlines depend on individual circumstances. Consult a qualified tax advisor or attorney regarding your situation.
Alternative investments are highly speculative, illiquid, and involve a high degree of risk, including the potential for a total loss of principal. These investments are not suitable for all investors and are typically intended solely for accredited or institutional investors who can bear the financial risks. Past performance is no guarantee of future results, and asset values will fluctuate. Any information presented is for educational and illustrative purposes only and does not constitute financial, legal, tax, or investment advice, nor does it form an offer to sell or a solicitation to buy any security. Offers can only be made through official offering documents — such as a Private Placement Memorandum (PPM), Prospectus, or Operating Agreement — which contain detailed information regarding risks, fees, and expenses. Investors must read all offering materials thoroughly and consult with an independent financial, tax, and legal professional before making any investment decision.
Securities offered through Arkadios Capital. Member FINRA/SIPC. Advisory services through Arkadios Wealth. Exclusive Financial Resources, LLC and Arkadios are not affiliated through any ownership.
