Disaster Extensions for 1031 Exchanges

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Disaster Extensions for 1031 Exchanges

Unfortunately, a 1031 Exchangor may find themselves in the middle of a 1031 Exchange when a federally declared natural disaster strikes. If a taxpayer can qualify themselves as an “affected taxpayer”, they may be able to get extensions to their 45-Day Identification Period and their 180-Day Exchange Period under Revenue Procedure 2018-58. As the Qualified Intermediary, we cannot establish if the taxpayer qualifies for the extension. A discussion between the taxpayer and their tax professional is required.

Taxpayers that may qualify for an extension are defined as follows: (a) An “affected taxpayer” as defined in IRC section 301.7508A-1(d)(1) of the Procedure and Administration Regulations; OR (b) Has difficulty meeting the 45-day identification or 180-day exchange deadlines for the following or similar reasons:

    1. The relinquished property or the replacement property is located in a covered disaster area;
    2. The principal place of business of any party to the transaction (for example, the qualified intermediary, exchange accommodation titleholder, transferee, settlement attorney, lender, financial institution, or a title insurance company) is located in the covered disaster area;
    3. Any party to the transaction (or an employee of such a party who is involved in the 1031 exchange transaction) is killed, injured, or missing as a result of the federally declared natural disaster;
    4. A document prepared in connection with the exchange (for example, the agreement between the transferor and the qualified intermediary or the deed to the relinquished property or replacement property) or a relevant land record is destroyed, damaged, or lost as a result of the federally declared disaster;
    5. A lender decides not to fund either permanently or temporarily a real estate closing due to the federally declared disaster or declared disaster or refuses to fund a loan to the taxpayer because flood, disaster, or other hazard insurance is not available due to the federally declared disaster; or
    6. A title insurance company is not able to provide the required title insurance policy necessary to settle or close a real estate transaction due to the federally declared disaster.

The extension also applies to relief workers affiliated with recognized charities and government agencies assisting in the affected area.

The IRS Notice itself, and additional information about tax relief in disaster situations, can be found on the “Tax Relief in Disaster Situation” page on the IRS website, which is periodically updated with information regarding the disaster, including any modifications to the IRS Notice after it is initially released.

If an IRS Notice is issued that makes the tax relief described in the Rev. Proc. available, the 45- and 180-day exchange deadlines (in a delayed exchange or reverse exchange) are extended if the applicable requirements are satisfied. The length of the extension depends on which section of the Rev. Proc. applies: Section 6 or Section 17 (Rev. Proc. § 4.02). The Rev. Proc., in its entirety, can be found here: https://www.irs.gov/pub/irs-drop/rp-18-58.pdf.

Section 6: General Extension: An extension under Section 6 of the Rev. Proc.:

  • Will extend those 45-day and 180-day deadlines falling after the date of the disaster (and before the extended deadline date set forth in the IRS Notice) to the date set forth in the IRS Notice.
  • Is available only to an “Affected Taxpayer.” An “Affected Taxpayer” will be described in the IRS Notice, but is typically someone described in Section 301.7508A-1(d)(1) of the Procedure and Administration Regulations, and usually includes individuals who live in, and businesses whose principal place of business is located in, the covered disaster area (Rev. Proc. § 4.01).
  • Applies regardless whether the exchange began before or after the disaster date.

Section 17: Alternative Extension: An extension under Section 17 of the Rev. Proc.:

  • Will extend those 45- and 180-day deadlines falling after the date of the disaster to the extended deadline date set forth in the IRS Notice, OR 120-days, whichever is longer. However, an extension cannot extend beyond: one year; or the due date for filing the tax return for the year of the transfer (Rev. Proc. § 17.02).
  • Under Section 17 of the Rev. Proc., a 45-day identification period that falls before the date of the disaster may be retroactively extended if an identified replacement property (or an identified relinquished property in the case of a reverse exchange) is substantially damaged by the disaster (Rev. Proc. § 17.03)
  • Is available only if the relinquished property was transferred (or parked property acquired by the exchange accommodation titleholder) on or before the disaster date (Rev. Proc. § 17.02(2)(a)).
  • Is available to an “Affected Taxpayer” and a “non-Affected Taxpayer” who has difficultly meeting the exchange deadlines due to the disaster (Rev. Proc. § 17.02(2)(b)(i) & (ii)). A “non-Affected Taxpayer” may have difficultly for the following, or similar, reasons:
    1. The relinquished property or the replacement property is located in a covered disaster area;
    2. The principal place of business of any party to the transaction (for example, the qualified intermediary, exchange accommodation titleholder, transferee, settlement attorney, lender, financial institution, or a title insurance company) is located in the covered disaster area;
    3. Any party to the transaction (or an employee of such a party who is involved in the 1031 exchange transaction) is killed, injured, or missing as a result of the disaster;
    4. A document prepared in connection with the exchange (for example, the agreement between the transferor and the qualified intermediary or the deed to the relinquished property or replacement property) or a relevant land record is destroyed, damaged, or lost as a result of the disaster;
    5. A lender decides not to fund either permanently or temporarily a real estate closing due to the disaster or refuses to fund a loan to the taxpayer because flood, disaster, or other hazard insurance is not available due to the federally-declared disaster; or
    6. A title insurance company is not able to provide the required title insurance policy necessary to settle or close a real estate transaction due to the disaster.

PLEASE NOTE: It is critically important that if you feel you qualify as an Affected Taxpayer, you reach out to your Security 1st Exchange representative as soon as possible. We will not know if any disaster affects you, so you need to notify us as soon as possible.