If you and someone else own property together and that property is taken through an event like eminent domain, the tax rules can get confusing, fast. Ever heard of the “joint owners 1033 election”? It’s a special IRS rule that can help co-owners defer capital gains taxes when their property is involuntarily converted, like in a government taking. In this post, you’ll learn what this election means, how it works for different types of co-owners, and the steps you need to take to make the most of it.

What Is a Joint Owners 1033 Election?

A joint owners 1033 election is a tax option under Section 1033 of the Internal Revenue Code. It lets owners of property that was taken, destroyed, or condemned postpone paying capital gains tax if they reinvest the money into similar property. The twist? When a property has more than one owner, maybe you co-own with a friend, relative, spouse, or business partner, each person might be able to decide for themselves whether to make this election or not.

In simple terms, this rule gives each owner flexibility. You don’t all have to agree. One person can choose to defer taxes by reinvesting, while another can cash out and pay taxes right away.

Who Can Make a Separate 1033 Election?

Not every type of co-ownership is treated the same by the IRS. Let’s break down what this means for the most common situations.

Tenants in Common

If you own property as “tenants in common,” you each hold a separate share. The IRS sees you as individual owners. That means each of you makes your own decision about the 1033 election. If three people own a piece of land, for example, one can choose to reinvest and defer taxes, while the other two can take the money and pay taxes now. This is called a “tenants in common election.”

Joint Tenants and Spouses

Joint tenants usually have equal rights to the whole property, but the IRS still often allows separate elections. If you co-own with your spouse, you can each make your own “spouse election 1033”, so long as you’re not filing jointly and the property is legally owned separately. If you file a joint tax return, the decision is usually made together.

Partnerships and LLCs

If the property is owned by a partnership or LLC, things get trickier. The entity as a whole makes the 1033 election, not the individual members. This means everyone is bound by the same choice, so it’s important to discuss your options with your partners before making any moves.

Why Separate Elections Matter

You may be wondering, why does it matter if each co-owner can make their own election? The answer comes down to flexibility and personal goals. Maybe you want to reinvest in new property, but your co-owner wants to use their share for something else. The IRS allows for this individual decision-making in most co-ownership situations. This flexibility can help prevent disagreements and make the process smoother for everyone involved.

How to Make the 1033 Election as Joint Owners

The actual steps to make a joint owners 1033 election aren’t that complicated, but you need to follow the IRS rules closely.

  1. Figure out your ownership type. Are you tenants in common, joint tenants, spouses, or do you hold property through an entity like an LLC?
  2. Decide if you want to defer your gain. Only owners who reinvest in similar property within the IRS’s timeline (usually two to three years) can avoid immediate taxes.
  3. Report your choice on your tax return. Each owner must show their share of the gain and clearly state their election under Section 1033.
  4. Keep records. Save all documents related to the involuntary conversion, the amount received, and any reinvestments. This will make tax time much less stressful.

Common Scenarios and Examples

Let’s look at a few situations to make this concrete.

Imagine two siblings inherit a rental property as tenants in common. The city takes the property for a new road. One sibling wants to buy another rental property and defer taxes with a 1033 election. The other sibling wants the cash and is fine paying the tax now. Both can do what works for them.

Or consider a married couple who own a home together but file taxes separately. If the property is taken and they each receive half of the proceeds, each spouse can decide independently about making a spouse election 1033, depending on their own financial plans.

Tips for a Smooth Election Process

If you’re dealing with a joint owners 1033 election, a few simple steps can help you avoid headaches.

  1. Talk openly with your co-owners about your plans.
  2. Get clear legal and tax advice before making any decisions. The rules can change based on your exact situation.
  3. Act quickly. IRS deadlines for reinvestment can sneak up on you.
  4. Keep everything organized, your paperwork will be your best friend if the IRS has questions later.