Potential IRS Tax Relief for 1031 Exchange Time Period Deadlines
Special tax law provisions may help taxpayers recover financially from the impact of a disaster such as a flood, hurricane, tornado, wildfire or certain other natural disasters or catastrophic events. These provisions will occur when the federal government declares a location to be a “Presidentially-declared” disaster area; often referred to as a “federally-declared” disaster. If the IRS releases an official Tax Relief Notice, Section 17 of Revenue Procedure 2007-56 provides extensions of certain time deadlines in a 1031 exchange.
These time deadline extensions are not automatic and do not apply to some state or local states of emergency or all federal disasters. Keep in mind that the Tax Relief Notice must specifically state that the notice provides relief under Section 17 of Revenue Procedure 2007-56 in order to apply to the 1031 exchange time period deadlines. If the IRS issues a Tax Relief Notice or News Release listing an affected area, information can be found on the Tax Relief in Disaster Situation page on the IRS website.
Extensions apply to delayed and parking-arrangement exchanges and provide the greater of either a 120-day extension or until the specific deadline date provided in the extension. Generally, an extension is not allowed beyond the due date for filing the tax return for the years of the transfer. The exchange agreement must also include specific language to allow for time deadline extensions if an affected taxpayer has property in a Presidentially-declared disaster area.
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) have difficulty meeting the 45-day identification or 180-day exchange time deadlines for the following or similar reasons:
- The relinquished property 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 Presidentially declared;
- 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 Presidentially-declared disaster;
- A lender decides not to fund either permanently or temporarily a real estate closing due to the Presidentially-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 Presidentially-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 Presidentially-declared disaster.
A taxpayer should not assume they are automatically granted an extension simply because the above conditions are met. A review of the IRS News Release for the specific disaster should be conducted. Every News Release provides an understanding of the impacted areas and extensions that may be allowed. It is the taxpayer’s sole responsibility and obligation to consult with their tax advisor and to determine whether the taxpayer qualifies as an “affected taxpayer” within the meaning of Revenue Procedure 2007-56.
For more information on all disaster areas, visit the IRS: Tax Relief in Disaster Situations.