How a 1033 Exchange Works

The City Took My Property Via Eminent Domain…Now What?

Colorado Industrial Property

A 1033 exchange is one of the most overlooked tools available to Colorado property owners, particularly those facing eminent domain or forced sales due to public projects. While many people have heard about 1031 Exchanges, 1033 exchanges operate in a very similar way.

How? It allows you to defer capital gains taxes by reinvesting into replacement real estate but it is triggered by circumstances outside your control, such as condemnation, government taking, or destruction of property.

At its core, a 1033 exchange functions much like a 1031 exchange. In both cases, the goal is the same: reinvest proceeds into like-kind property held for investment or business use and defer taxes. Both strategies require you to purchase property of equal or greater value and fully reinvest the proceeds to avoid taxable gain. And in both structures, investors often use the exchange as an opportunity to upgrade assets, improve cash flow, or reposition geographically.

How is the 1033 exchange different than the 1031 exchange?

Where a 1033 becomes even more attractive is in its flexibility. Unlike a 1031 exchange which has strict 45-day identification and 180-day closing deadlines a 1033 exchange typically provides a 2–3 year reinvestment window. There is also no requirement to use a qualified intermediary, meaning you can hold and deploy your funds more strategically while evaluating replacement opportunities. For Colorado property owners navigating eminent domain, this added time can be critical.

Another key similarity between the two structures is the definition of “like-kind” property. Just like a 1031, a 1033 exchange for real estate generally allows you to move between asset classes—such as from raw land to a rental property—as long as the replacement is held for investment or business purposes. This is particularly relevant in Colorado, where land in growth corridors is often taken for infrastructure, and owners may want to transition into income-producing assets in mountain or urban markets.

A common scenario might involve a landowner in a path-of-growth area whose property is acquired for a roadway or municipal project. Such areas include Castle Rock, Federal Heights, Weld County, Broomfield County and more. (Also, Denver has many new development projects underway from the Ball Arena redevelopment to the River Mile, Fox Parks Urban Center, and Ridgegate Master Plan Community and even the new Broncos stadium area).

Through a 1033 exchange, that owner can reinvest into a rental property, multifamily asset, or other income-producing real estate and defer taxes, similar to how they would in a 1031 exchange. The key difference is that the 1033 provides more time and fewer procedural constraints, making it a more forgiving structure in a forced-sale situation.

While a 1031 exchange is a proactive investment strategy and a 1033 exchange is reactive, they are fundamentally aligned in purpose and outcome. Both allow investors to preserve capital, defer taxes, and continue building wealth through real estate. For Colorado property owners facing eminent domain, understanding the overlap between these two strategies is critical because in many cases, a 1033 exchange offers the same benefits as a 1031, with even greater flexibility.

If you’re curious about learning more, we always suggest you speak with a trust tax professional, a legal professional as well as a licensed Colorado real estate broker.