Rev. Rul. 57-314

Advice has been requested as to the tax effect of the disposition of rental property which has been found not to meet the requirements of a housing ordinance.

In the instant case, the taxpayer owns and manages rental properties consisting of trailers, cabins, cottages and rooming houses. Due to local slum clearance legislation, the renting of trailers and cabins has become difficult. Extensive repairs are required due to orders from building, fire and health inspectors, and failure to comply with such orders would result in condemnation of the property as unfit for human habitation and criminal prosecution of the taxpayer for violation of the local housing ordinance. To avoid meeting the requirements of the inspectors, the taxpayer is selling the trailers and cabins and purchasing other types of property for rental purposes.

Section 1033 of the Internal Revenue Code of 1954 provides for the nonrecognition of gain, under prescribed conditions, resulting from certain involuntary conversions of property into money or other property. For purposes of section 1033, an involuntary conversion is a transaction in which property has been compulsorily or involuntarily converted as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof. All involuntary conversions, then, are not covered by this section. Only those involuntary conversions which result from one of the specified causes are entitled to treatment under section 1033. See The Davis Company v. Commissioner , 6 B.T.A. 281, at 284, acquiescence, C.B. VI-2, 2 (1927); and Philip F. Tirrell v. Commissioner , 14 B.T.A. 1399 at 1402.

It is the position of the Internal Revenue Service that the term `condemnation,' as used in section 1033 of the Code, refers to the process by which private property is taken for public use without the consent of the property owner but upon the award and payment of just compensation. Such term does not include a condemnation of rental property by a public authority on the ground that structural defects and sanitary deficiencies make the property unfit for human habitation. For this reason a sale of such property to private interests to avoid making improvements to the property necessary to meet a housing ordinance is not considered to be an involuntary conversion of such property as a result of a threat or imminence of condemnation within the meaning of section 1033.