In 1997, Congress gave the Treasury the authority to postpone certain deadlines by reason of Presidentially declared disaster. (In 2002, it was extended to include terroristic or military actions.) This authority has been invoked many times since then, most recently for those suffering the effects of Hurricane Ida.
While most people are aware of the very well-publicized extension of time to file tax returns – January 3, 2022 – there are other statutory deadlines that may also be extended. The Internal Revenue Code is replete with actions that must be undertaken within a specified period of time in order for taxpayers to reap the intended benefits. Among the most prominent is the Section 1031 deferral of gain on the exchange of real property.
It is up to the Internal Revenue Service (IRS) to decide if it will extend the deadlines for these time- limited actions. It did so for 1031 with the Ida relief. What does that mean? Affected taxpayers in most cases now have until January 3, 2022 to meet the 45-day identification deadline and 180-day acquisition deadline if those deadlines fall between September 1, 2021 and January 2, 2022 (the “extension period”). The details, along with discussions of all the eligible actions, can be found in an IRS Revenue Procedure from 2018. (Rather than publish a new one each time there is a disaster, the IRS simply invokes it again, rewriting it only when it gets too outdated.)
Affected taxpayers, those individuals whose principal residence or business entities whose principal place of business is located in covered disaster areas (you can find the counties here), are eligible for the following relief (known as Section 4 relief) if the deadline falls in the extension period:
- Deferred exchanges:
- the 45-day deadline to identify replacement property
- the 180-day deadline to acquire replacement property
- Reverse exchanges:
- the 5-day deadline to enter into a qualified exchange accommodation agreement with an exchange accommodation titleholder
- the 45-day deadline to identify relinquished property
- the 180-day deadline to sell relinquished property
Section 17 of the Revenue Procedure provides additional relief for certain taxpayers regardless of whether they meet the definition of “affected taxpayers,” extending the deadlines for 120 days or January 3, 2022, whichever is later. In order to qualify the transaction must have commenced on or before September 1, 2021 and the taxpayer is either an affected taxpayer or has difficulty meeting one of the exchange deadlines because:
- 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, a 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 section 1031 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 refuses to fund a loan to the taxpayer because flood, disaster or other hazard insurance is not available due to the federally declared disaster
- 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.
These are complicated but, ultimately, taxpayer-friendly provisions. Your Friedman LLP advisor is available to help you determine if you are eligible for relief and how best to take advantage of it.