How to Defer Capital Gains When Selling Your Fire‑Damaged Lot

Quick Take: Use §1033 for involuntary conversions, §1031 for investment land sales, and §121 for your home—often in combination.

Why a Fire Sale Can Still Trigger Tax

Even after total loss, you may owe capital gains if insurance or sale proceeds exceed your adjusted basis. Long‑time CA owners are especially exposed.

Option 1 — §1033 Involuntary Conversion

For property destroyed by casualty/condemnation where you receive compensation:

Who qualifies: Owners with involuntary conversion (fire, theft, condemnation).
Time limit: Generally 2 years from the end of the tax year of gain; 4 years in federally declared disaster areas.
Replacement: “Similar or related in service or use.” For rentals, this typically means other investment real estate.
How to elect: Report on your return and make a §1033 election.

💡 Example: Insurance proceeds of $700k on a duplex with $300k basis. Reinvest the full $700k into another rental within the window → $400k deferred under §1033.

Option 2 — §1031 Like‑Kind Exchange (Investment Property)

Selling a burned investment lot? You can often use §1031 to defer gain if you meet 45/180‑day rules, use a QI, and acquire like‑kind investment property.

§1031 vs §1033 (At a Glance)

Feature	§1031 Like‑Kind	§1033 Involuntary
Applies to	Voluntary sale	Disaster/condemnation
Deadline	45/180 days	2–4 years
QI needed?	Yes	No
Replacement	Like‑kind investment	Similar/related in use
Personal‑use allowed	No	Sometimes (primary residence)

Option 3 — §121 Home Sale Exclusion

For a primary residence, you may exclude up to $250k/$500k of gain if you meet the 2‑of‑5‑year tests. Excess gain may still be deferrable under §1033.

Coordinating the Rules

Mixed‑use? Apply §121 to the home portion, and §1031/§1033 to the rental portion. Keep meticulous records of insurance, repairs, and sale docs.

Need a plan after a fire?
👉 Confidential consult to map §121/§1031/§1033 timing.