1031 EXCHANGE UPDATE:
TAX RELIEF FOR TEXAS
THE IRS ISSUES DISASTER RELIEF FOR TAXPAYERS
AFFECTED BY SEVERE WINTER STORMS IN TEXAS
By: James T. Walther, Esq., LL.M., General Counsel,
Legal 1031 Exchange Services, LLC
As you may be aware, the state of Texas was recently declared a FEMA disaster area due to the impact of historically severe winter storms. On February 22, 2021, the IRS published Notice TX-2021-02, providing tax relief for Texas taxpayers. This relief extended many filing deadlines and other time sensitive deadlines to June 15, 2021, if the deadlines fall on or between February 11, 2021 and June 15, 2021. It is important for taxpayers who are utilizing a 1031 exchange (“Exchangers”) to understand the effects of Federally declared disasters on the strict deadlines for completing an exchange.1
For delayed or forward exchanges, the 1031 rules set two time periods for a total deadline of 180 calendar days to close escrow on replacement property. The first 45-days are an identification period, in which the taxpayer/Exchanger must identify potential replacement properties. The Exchanger then has 135 days after the close of the identification period in which to close escrow on at least one identified property (total 180-day period). Those Exchangers transacting a reverse exchange get 180-days to sell parked property after the transfer of ownership to an exchange accommodator.
In the event of a federally declared disaster, an Exchanger may be eligible for an extension of either deadline, or both. In general, to qualify for an extension, the deadline must fall on or after the date of the Federally declared disaster. After each specific disaster event, the IRS will publish a Disaster Relief Notice and other guidance generally available on the IRS website’s disaster resources page.
These publications specify which counties have been affected and the type and duration of relief provided. For Exchangers to obtain extensions, the notice must specifically mention Rev. Proc. 2018-58. Section 17 of Rev. Proc. 2018-58 provides that a taxpayer involved in a 1031 exchange may be eligible for a time extension of the 45-day and the 180-day deadlines for the later of 120 days or the extension date listed on the IRS Notice (previously IRS Rev. Proc. 2007-56, Section 17).2 In addition to being an “affected taxpayer,” the Exchanger must have transferred their property to a buyer; or transferred “qualified indicia of ownership” to an Exchange Accommodation Titleholder pursuant to Rev. Proc. 2000-37 (i.e. reverse exchange) on or before the date of the Federally declared disaster. However, note that a taxpayer can qualify for relief 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; a lender will not fund the loan due to the disaster; or a title insurance company is not able to provide the necessary insurance policy to settle or close a real estate transaction due to a federally funded disaster. Therefore, an exchanger can potentially qualify for relief in Section 17 or other relief in a Notice that applies Section 17 to the disaster, even if all properties involved in the exchange are not in the disaster area. Recently, there has been some debate as to the application of IRS Notices that mention Rev. Proc. 2018-58 in whole, but do not specifically mention Section 17.
Here are relevant excerpts from Notice TX-2021-02 relevant to eligibility and relief provided:
Notice TX-2021-02 applies to “Individuals and households affected by severe winter storms that reside or have a business in all 254 Texas counties qualify for tax relief.”
The Notice also specifies – “For instance, certain deadlines falling on or after February 11, 2021, and before June 15, 2021 are postponed through June 15, 2021. This includes various 2020 business tax returns due on March 15 and 2020 individual and business returns due on April 15. Taxpayers also have until June 15 to make 2020 IRA contributions.”
Furthermore, Rev. Proc. 2018-58, Section 17 is mentioned: “The relief described in section 17 of Rev. Proc. 2018-58, pertaining to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.”
Pursuant to the Notice, the specified relief is automatic for “affected taxpayers.” Taxpayers who are not “affected taxpayers” or located in the disaster area but may otherwise be eligible due to a reason listed in Section 17, must contact the IRS as specified in the Notice.3 Taxpayers that are potentially impacted should review the full Notice with an advisor.
Eligibility for disaster extensions could vary on a case-by-case basis and the Covered Disaster Areas specified in IRS guidance are often updated over time. Exchangers and their advisors should carefully review any IRS guidance regarding disaster relief and make any determinations accordingly. When considering the impact of these disasters, it is important to determine if you or one of your clients is an affected taxpayer or otherwise eligible for tax relief, even if located far from the disaster area. If so, you should promptly contact your Section 1031 qualified intermediary.
Our thoughts go out to those who have been affected by the severe storms.
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1 “Federally declared disasters” = “Presidentially declared disasters.” Historically, IRS guidance referred to “Presidentially declared disasters” but Rev. Proc. 2018-58 implemented a change in terminology.
2 Available at: https://www.irs.gov/pub/irs-drop/rp-18-58.pdf.
3 The IRS website states: To obtain tax relief, affected taxpayers not located in the IRS Designated Disaster Area must: Call the Disaster Assistance Hotline at 1-866-562-5227 and explain your situation to the assistor. After self-identifying, telephone assistors will manually code your accounts for the relief.
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Update: After this article was published the IRS also published the IRS also published similar relief for Oklahoma.
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.
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