Disaster Relief for Section 1031 Exchange Transactions

  • Real estate
  • 3/3/2021

Due to the recent winter storms in Texas and subsequent disaster declaration by the Federal Emergency Management Agency (FEMA), the IRS granted relief to affected ta...

Due to the recent winter storms in Texas and subsequent disaster declaration by the Federal Emergency Management Agency (FEMA), the IRS granted relief to affected taxpayers. For Texas taxpayers and those in other states impacted by the winter storms that received similar FEMA disaster declarations, tax filing and payment deadlines were extended until June 15, 2021. For those involved in Section 1031 exchange transactions during this time, we can refer to Revenue Procedure 2018-58, which outlines the special rules that apply.

But before we dive into the specifics of Revenue Procedure 2018-58, it is important to note that Section 1031 exchange extensions are not automatically available to taxpayers upon the declaration of the disaster. Extensions also do not apply to all federal disasters or states of emergency.

An IRS News Release or other similar guidance will define an “affected taxpayer.” The relinquished property will need to have been transferred on or before the date of the “federally-declared” disaster. The taxpayer will also need to have difficulty meeting the 45-day identification period or 180-day exchange period deadline, which can be due to the following reasons:

  • The relinquished property or replacement property is located in the “federally-declared” disaster area.
  • The principal place of business of any party to the exchange transaction is located within the “federally-declared” disaster area. Examples could include the qualified intermediary, exchange accommodation titleholder, title insurance company, attorneys or lenders.
  • A title insurance company is unable to provide the required insurance policy necessary to settle or close the transaction because of the “federally-declared” disaster.
  • A financial institution is unwilling, either temporarily or permanently, to fund a real estate closing due to the “federally-declared” disaster.
  • Any party to the transaction is killed, injured or is missing as a result of the “federally-declared” disaster.
  • A document prepared in connection with the exchange or a relevant record is destroyed, damaged or lost as a result of the “federally-declared” disaster.

If the last day of a 45-day identification period or the last day of a 180-day exchange period fall on or after the date of a “federally-declared” disaster, relief is granted to the later of 120 days or to the last day of the general disaster extension period, as authorized in the IRS News Release or other similar guidance. This postponement also applies to the last day of the 45-day identification period if the identified relinquished property or identified replacement property is substantially damaged by the “federally-declared” disaster. The postponement cannot go beyond the due date (including extensions) of the taxpayer’s tax return for the year of the transfer or one year.

Source: IRS.gov

This blog contains general information and does not constitute the rendering of legal, accounting, investment, tax, or other professional services. Consult with your advisors regarding the applicability of this content to your specific circumstances.

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