With subtropical storm Alberto blasting the southeastern corner of the U.S and hurricane season right around the corner, it is important to know how Mother Nature’s unpredictability can affect your tax deferred exchange. Today’s Thankful Thursday addresses Section 17 of Revenue Procedure 2007-56 which provides extensions to exchange deadlines if you are affected by a federally declared disaster.
There are two deadlines in a 1031 exchange: the 45-Day Identification Period and 180-Day Exchange Period. The 45-Day Identification Period starts with the closing of the relinquished property and requires the written identification of like-kind property you wish to acquire during the exchange. The 180-Day Exchange Period runs concurrently with the 45-Day Identification Period and requires the purchase of all chosen identified replacement property. For more information on exchange deadlines, click here.
Typically, there is no way to extend these deadlines. Under Revenue Procedure 2007-56, however, you may qualify for an extension if you are affected by a federally declared disaster. The IRS issues a Tax Relief Notice identifying those affected areas covered by an extension. That list can be found on the IRS website under Tax Relief in Disaster Situations.
Section 17 extends the time periods in delayed 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 Tax Relief Notice but not beyond the due date for filing the tax return for the year of the transfer, including extensions.
According to the IRS, 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:
- The relinquished property (in a reverse exchange) or the replacement property is located in a covered disaster area;
- 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;
- 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 disaster;
- 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;
- 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
- 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 extensions are not automatic and do not apply to state or local states of emergency or all federally declared disasters. If you are affected by a federally declared disaster, it is important that you contact your Exchange Officer and professional advisors immediately to see if you are a qualified “affected taxpayer” and, if so, what steps you must take to successfully complete your exchange.
