1031 Exchange Disaster Extension Calculator
1031 Exchange Disaster Extensions and Disaster Extension Calculator Pursuant to Rev. Proc. 2018-58, Section 17
In order to properly structure a 1031 exchange transaction, the Exchanger has 45-days in which to identify potential replacement properties, as well as the earlier of a total of 180 - days or the date upon which the exchanger has to file its tax return for the year in which the exchange was initiated, to complete the purchase of the replacement properties. The exchanger may file an extension of their federal tax return filing date in order to take advantage of the full 180-days in which to purchase their replacement property. These are calendar days, not business days, and if the final day of the 45 or 180-day period falls on a weekend or holiday, it does not rollover to the next business day. In general, the rules do not provide extensions for these time deadlines, absent a federally declared disaster, terroristic action, the taxpayer being called to active military duty, or serving in support of armed forces in a combat zone.
In the event of a federally declared disaster, an exchanger may be eligible for an extension of either deadline, or both. Typically, the disaster relief is available to “affected taxpayers” and to other transferors of property who are specifically impacted as defined in Rev. Proc. 2018-58, Section 17.
The disaster relief process: Generally, after a federally declared disaster, the IRS issues a news release, notice, or other guidance designating who is an “affected taxpayer” (“Notice”). An IRS Notice can be retroactive to a specific disaster date. For a taxpayer transacting a 1031 exchange to be eligible for an extension, the Notice must specifically mention IRS Rev. Proc. 2018-58.
Section 17 of the Rev. Proc. provides that a taxpayer transacting a 1031 exchange may be eligible to extend either or both of the 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 specifies otherwise. See More
How does the extension work? It depends on where the taxpayer is in the exchange timeline. If a taxpayer is still within the 45-day ID period they would, historically, receive an additional 120 days to identify, plus an extra 120-days, in addition to the 180-days, in order to close (for a total of 300 days). For example, if the IRS Notice were to designate a date that the disaster took effect for a specified area – and the taxpayer started their exchange (i.e. Feb. 5th) prior to the disaster date (i.e. March 20th), and their 45th day fell afterward (i.e. March 21st), they would qualify for an extension.
In general, there are two criteria that a taxpayer must meet to qualify relief:
Transfer on or before the disaster date: the exchange must have started (property relinquished to a buyer or transferred to an Exchange Accommodation Titleholder in a reverse exchange) on or before the date of the federally declared disaster. Note that the IRS has recently treated some disasters as ongoing, specifying a disaster period, as opposed to a single date. If the 45-day period has expired before the specified date in the Notice, the exchanger might only be able to extend the 180-day deadline, unless identified property was substantially damaged.
Located in a disaster area: Historically, federally declared disasters are specific to taxpayers in located in affected areas – the IRS designates eligible areas on a county by county basis, in a published Notice. These IRS Notices specify which counties have been affected, the date the disaster began, and the type and duration of tax relief provided. Pursuant to these Notices, affected taxpayers are automatically eligible for relief. Here is a link to the IRS website’s resource on disaster relief notices and guidance.
Please keep in mind that pursuant to Revenue Procedure 2018-58, section 17, a taxpayer who is not otherwise an “affected taxpayer” as defined in the IRS disaster relief guidance ( i.e. they are not located in the “Covered Disaster Area” or doesn’t meet other eligibility) can be eligible for an extension of the 45-day identification deadline or 180-day exchange period deadline for a variety reasons, including, but not limited to: the relinquished or replacement property is located in the federally declared disaster area; the principal place of business of any party to the transaction is located in the disaster area; or a lender will not fund the loan due to the disaster.
CV-19 disaster extensions and 1031: Due to the Covid-19 pandemic, Notice 2020-23 differed from many prior Notices in that it provided much broader relief to all taxpayers with time sensitive deadlines listed in Rev. Proc. 2018-58, that fell between April 1, 2020 and July 15, 2020. The Notice extended those deadlines until July 15th but due a departure from standard language, there was some debate among tax and legal professionals regarding the nature of the relief that the Notice granted and whether the 120 day extension provided for in Rev. Proc. 2018-58 Section 17 applied. On August 11, 2020, almost a month after the July 15th deadline passed, the IRS issued a CV-19 FAQ stating that “Notice 2020-23 did not extend the relief provided in section 17 of Rev. Proc. 2018-58 to taxpayers engaging in section 1031 like-kind exchanges. Therefore, the section 1031 deadlines addressed in items 26 and 27 of section 6 of Rev. Proc. 2018-58 that fall on or after April 1, 2020, and before July 15, 2020, are not extended beyond July 15, 2020.”
For additional information on the issue, please read our article: It’s a Struggle to Understand the IRS’ Guidance for 1031 Extensions and summary of the August 11, 2020 guidance. As a resource, we are also providing a link to our CV-19 disaster extension calculator with article which discussed the decision that taxpayers had to make in light of ambiguity and lack of guidance.
Eligibility for disaster extensions could vary on a case by case basis. Exchangers and their advisors should carefully review any IRS Notices regarding extensions and make determinations regarding extensions accordingly.
DISASTER EXTENSION CALCULATOR PURSUANT TO REV. PROC. 2018-58
The above disaster extension calculator assumes that the 120-day extensions provided for in Rev. Proc. 2018-58, Section 17 apply. Taxpayers should consult with their tax or legal advisors to verify their 1031 exchange deadlines because future disaster relief Notices may provide for more or less than the standard 120-day extension. In addition, please note that Rev. Proc. 2018-58 does not provide that a taxpayer is able to re-open an expired identification period unless the disaster has substantially damaged one or more of the identified properties.
Please also consult with your tax advisor to address any tax filing requirements which could potentially reduce your original or extended 45-day or 180-day period. Taxpayer may need to file for an extension of their tax filing deadline. If your 1031 deadline falls on a weekend or holiday it does not roll over to the next business day.
Legal 1031 does not provide tax or legal advice, nor can we make any representations or warranties regarding the tax consequences of any transaction. Taxpayers must consult their tax and/or legal advisors for this information. Unless otherwise expressly indicated, any perceived federal tax advice contained in this article/communication, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.