Disaster Relief IRS Issued Tax Relief & 1031 Extensions

Deadlines for completing a 1031 Exchange are straightforward. Once you close on the sale of your old property, you have 45 days to locate the new property that you want to purchase and 180 days to complete the purchases of the new property. However, when a catastrophic event that affects large numbers of people, such as hurricanes, tornados, wildfires, floods and terrorist actions occur, the government may issue tax relief extensions, which also may extend your 1031 deadlines.

If the IRS issues an official notice, then Section 17 of Revenue Procedure 2007-56 provides postponement provisions specific to 1031 Exchange deadlines that apply in the case of federally declared disasters. Section 17 extends the 45- and 180-day periods in forward and reverse exchanges that fall on or after the date of a federally declared disaster by the later of 120 days or the date specified in the relevant IRS News Release (Tax Relief Notice), but not beyond the due date for filing the tax return for the year of the transfer.

After a catastrophic event, the IRS may issue a Tax Relief Notice identifying counties state-by-state that have been declared disaster areas. The IRS issued Tax Relief notices for the recent storms and flooding in Alabama, Arkansas and Mississippi. A Tax Relief Notice must specifically state that it provides relief under Section 17 of Rev. Proc. 2007-56 in order for the notice to apply to like-kind exchanges. FEMA disaster notices, which are typically published well before IRS Tax Relief Notices, do not have any effect upon 1031 Exchange deadlines.

To qualify for an extension of the section 1031 deadlines, the relinquished property must have been transferred on or before the date of the federally declared disaster, AND the exchanger must be an “affected taxpayer” OR must have difficulty meeting the exchange deadlines due to one of the following disaster-related reasons:

  • The Relinquished or Replacement property is in the covered disaster area
  • The principal place of business of any party to the transaction is in the disaster area (i.e. Qualified Intermediary, Exchange Accommodation Titleholder, Settlement Agent, Lender, Title Insurer)
  • Any party to the transaction dies, is injured or is missing
  • Documents relating to the exchange or transaction are destroyed, damaged or lost
  • The lender will not fund because of the disaster
  • Title, hazard, flood or other such insurance is no longer available for that property

The rules related to qualifying for a disaster extension can be complicated, and a taxpayer should always seek advice from a competent tax advisor or attorney regarding entitlement to the extension. Additionally, it is important to note that in order for the taxpayer involved in an exchange to take advantage of these disaster relief options, the exchange agreement must include language allowing for extensions in the event of federally declared disasters.

This example is hypothetical and used only to illustrate a possible scenario. Because each investor’s tax implications are different, you should consult your tax advisors. Any real estate investment is subject to risks, including those real estate risks associated with the operation and leasing of commercial properties. There is no guarantee investors will receive distributions or the return of their capital. All real estate investments have the potential to lose value during the life of the investment.

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