Disaster Area 1031 Exchange Extension
Carl E. Sera, CMT
August 8, 2023
While the IRC Section 1031 deadlines must be strictly adhered to, extensions may be granted in the event of natural disasters. Extensions of the 45-day identification and 180-day exchange deadlines are allowed to qualifying investors affected by federally declared disasters, "acts of terror," and military actions under Rev. Proc. 2007-56.
When relief is available, the IRS usually releases a notice or other guidance and puts it on the IRS website, which can be found by searching "Disaster Relief." Investors will also be able to locate additional resources for assistance in the event of a disaster.
What is a 1031 Exchange Extension?
A 1031 exchange extension refers to an extension of the 45-day identification and 180-day exchange periods of a traditional 1031 exchange. This extension is granted under certain circumstances, such as when a natural disaster or other unforeseen event causes a delay in the completion of the exchange.
The extension allows investors additional time to identify and acquire a replacement property, while still deferring capital gains taxes on the sale of their original property.
An extension can be a valuable tool for real estate investors who are looking to maximize the benefits of a 1031 exchange. It can provide flexibility and peace of mind, as investors can be confident that they will not be forced to pay taxes on their gains if they encounter unexpected delays.
However, it is important to note that not all circumstances will qualify for an extension, and investors should work closely with their tax advisors to ensure that they meet all necessary requirements. In addition, investors should be aware that an extension may not be granted automatically and may require additional paperwork and fees.
Overall, a 1031 exchange extension can be a powerful tool for real estate investors seeking tax-efficient exit planning solutions. It offers flexibility and peace of mind while allowing investors to continue building their real estate portfolios.
How Does the Disaster Extension Process Work
Following a federally declared disaster, the IRS will typically issue a news release, notice, or other guidance identifying who is an "affected taxpayer" ("Notice"). An IRS Notice might be retroactive to the date of the disaster. To be eligible for an extension, a taxpayer conducting a 1031 exchange must specifically reference IRS Rev. Proc. 2018-58 in the Notice.
Section 17 of the Rev. Proc. states that a taxpayer who began a 1031 exchange on or before the disaster date may be eligible to extend either or both deadlines for the later of 120 days or until the date or last day of a period listed on the IRS Notice, unless the Notice or guidance states otherwise.
How does the extension work? It depends on where the taxpayer is in the exchange timeline. If a taxpayer is still inside the 45-day ID period, they would often be given an additional 120 days to identify, as well as an additional 120 days to close (for a total of 300 days).
For example, if the IRS Notice designated a date on which the disaster took effect for a specific location - and the taxpayer began their exchange (i.e. Feb. 5th) prior to the disaster date (i.e. March 20th), and their 45th day happened subsequently (i.e. March 21st), they would qualify for an extension.
Criteria To Qualify For Relief:
In general, there are two criteria that a taxpayer must meet to qualify for relief. They include:
Transfer on or before the Disaster Date
The exchange must have begun on or before the disaster date (property relinquished to a buyer or transferred to an Exchange Accommodation Titleholder in a reverse exchange). It is worth noting that the IRS has recently classified some crises as continuing, requiring a disaster term rather than a single date. If the 45-day term ends before the designated date in the Notice, the exchanger may only be permitted to extend the 180-day deadline unless the identified property was significantly damaged.
Located in a Disaster Area
Historically, federally declared disasters have been limited to taxpayers who live in impacted areas; the IRS selects qualifying locations in a published Notice on a county-by-county basis. These IRS Notices detail which counties have been affected, when the disaster began, and the type and duration of tax relief available. Affected taxpayers are automatically entitled to relief under these Notices. Here is a link to the IRS website's disaster relief notices and guidance resource.
Can I Extend the 1031 Exchange Period if I Don't Meet the Identification or Exchange Period Requirements?
Yes, there are certain circumstances where you can extend the 1031 exchange period if you don't meet the identification or exchange period requirements. The IRS allows for a "disaster extension" in cases where a federally declared disaster (such as a hurricane or wildfire) impedes the taxpayer's ability to complete the exchange within the normal timeframe. Additionally, if the taxpayer becomes incapacitated or dies during the exchange period, the exchange period can be extended. However, it's important to note that these extensions are granted on a case-by-case basis, and it's always best to consult with a qualified tax professional to determine your options. That said, it's generally recommended that real estate investors carefully plan their 1031 exchanges to ensure that they meet all necessary requirements within the allotted timeframe. By doing so, investors can take advantage of the significant tax benefits that a successful exchange can provide, while also ensuring a smooth and efficient exit from their current investment property.
What Documents Do I Need to Extend the 1031 Exchange Period?
The good news is that you can request an extension of the 1031 exchange period from the IRS, but you need to follow specific rules and procedures to do so. First, you need to file Form 8824, Like-Kind Exchanges, with your tax return and tax filing for the year in which the exchange began. On that form, you'll report the details of the exchange, including the date you sold the relinquished property, the value of the property, and the date you acquired the replacement property.
General Postponement and Timelines
If you need more time to identify or acquire replacement property, you can request an extension of the 45-day or 180-day periods by filing Form 8893, Election to Defer Gain on the Sale of Qualified Opportunity Fund Stock or Partnership Interest. Although this form is typically used for deferring gains from qualified opportunity zones, it also includes a section for requesting an extension of the 1031 exchange period due to a federally declared disaster.
Will I still receive the tax benefits if I extend the 1031 exchange period?
Yes, you can still receive the tax benefits of a 1031 exchange if you extend the exchange period.
Because there are so many variables to qualify for disaster relief, contact your Qualified Intermediary immediately if either your relinquished or replacement property resides in a federally designated disaster area. As always, consult your tax advisor and legal counsel on this and other options you may have when a disaster strikes.
About Sera Capital
Sera Capital is a wealth management consulting firm specializing in all aspects and all available tax-efficient exit options for business owners, real estate investors, and developers. Our team works with you and your advisors to examine all available solutions, including 1031 Exchanges, Delaware Statutory Trusts, 721 UPREITS, Opportunity Zone Funds, and Section 453 Installment Sales, including Deferred Sales Trusts and Structured Installment Sales. We have two mottos. The first is “We help landlords and business owners exit tax efficiently,” and our second is “When you want out, call us in.”