January 17, 2023
By: Julia Mastrotto, Esq., Counsel
Beginning January 8, 2023, a severe winter storm made landfall and resulted in flooding and mudslides that severely impacted areas of California.
Due to the disruption caused by the storm, the IRS issued tax relief pursuant to IRS Notice CA-2023-01, dated January 10, 2023, updated January 11, 2023 to include additional counties (the “IRS Notice”), to those who reside or have businesses located in specified California counties:
“Following the disaster declaration issued by the Federal Emergency Management Agency, individuals and households affected by severe winter storms, flooding, and mudslides that reside or have a business in Alameda, Colusa, Contra Costa, El Dorado, Fresno, Glenn, Humboldt, Kings, Lake, Los Angeles, Madera, Marin, Mariposa, Mendocino, Merced, Mono, Monterey, Napa, Orange, Placer, Riverside, Sacramento, San Benito, San Bernardino, San Diego, San Francisco, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus, Sutter, Tehama, Tulare, Ventura, Yolo, and Yuba counties qualify for tax relief.”
This article will discuss how IRS Notice CA-2023-01 may apply to the 45-day and 180-day deadlines for ongoing IRC Section 1031 exchanges.
The Notice provides universal tax relief that extends the deadline to file various individual and business tax returns and to make tax payments for affected taxpayers until May 15, 2023, if the deadline falls between the disaster date (January 8, 2023) and the extended deadline (May 15, 2023). The Notice also covers extensions of the deadlines for other time-sensitive actions, including those specified in Rev. Proc. 2018-58, which cover the deadlines applicable to Section 1031 “like-kind” exchanges.
An affected taxpayer transacting a 1031 exchange has two potential deadline extension options pursuant to the Federal Relief. Dependent on when the exchange commenced, an affected taxpayer could qualify for one or both options explained below.
Sections 4 and 17 of Revenue Procedure 2018-58 provide relief available to “affected taxpayers” (generally deemed to be individuals whose principal residence or a business entity whose principal place of business – are located within the geographic area specified in the Notice). See IRC 301.708A-1(d) for additional categories. Although the relief is “automatic” for affected taxpayers and does not require an application to the IRS, it is also elective in the sense that Exchangers have discretion over whether to apply the relief. Section 17 also provides expanded relief to cover impacted 1031 Exchangers who are not “affected taxpayers” as defined in the Notice (see below). Taxpayers are also advised to consult with their tax or legal advisors regarding State-level tax relief for the specified disaster.
1. Relief provided in an IRS Notice, aka “General Relief” or “Section 4 Relief”
On or after date: January 8, 2023 (Disaster Date per the Notice)
Extension Date: May 15, 2023 (Last Day of the General Extension)
Section 4 Relief is general relief that is provided to all “affected taxpayers” as defined in the Notices, who have tax related deadlines falling on or after the disaster date and prior to the Extension Date. Section 4 relief provides for an extension of certain deadlines falling on or after the specified date. The Notice will also specify an “extension date” detailing the type and duration of relief provided. In the context of a 1031 exchange, this relief can apply to a 45-day or 180-day deadline that falls between the Disaster Date and the Extension Date (per Rev. Proc. 2018-58 Section 6).
2. Relief provided under Rev. Proc. 2018-58, aka “Section 17 Relief”
Per the IRS Notice, there are other options for affected taxpayers who started a 1031 Exchange on or before the start of the disaster specified in the IRS Notice. Extended Relief pursuant to Rev. Proc. 2018-58, Section 17, can apply to both 1031 exchange deadlines (45-day and 180-day) and is discussed in detail below:
|On or before date:||January 8, 2023|
|Section 17 extension date:||120 days added to each deadline|
|45-day identification deadline + 120 days|
|180-day exchange period deadline + 120 days|
|the last day of the general extension, if that date is later|
|(May 15, 2023)|
“Impacted 1031 Exchangers” – It is important to note that under Rev. Proc. 2018-58, Section 17, expanded relief is available for qualifying taxpayers transacting a 1031 exchange who are domiciled outside of the disaster area. Impacted 1031 Exchangers can qualify for relief based on a variety of reasons, as explained below.
Our website also features an extension calculator for those who qualify for Section 17 Relief.
Extending 1031 Exchange deadlines – an elective choice: Dependent on the length of the Section 4 relief provided (“Notice Relief”), an affected taxpayer who qualifies for deadline extensions pursuant to both Section 4 and Section 17 may elect which extension to apply to their deadlines, or whether to apply any extension at all. Often, the ultimate choice rests on the potential to identify and acquire suitable replacement property in one of the time frames: the original exchange deadlines; or as extended by Sec. 4; or as extended by Sec. 17. An additional consideration in making this decision is that an extension of the identification deadline or the end of the exchange period can affect the timing of when an intermediary can release from escrow any remaining exchange funds.
Please note that a deadline cannot be extended for more than one year beyond the due date of the taxpayer’s return for the tax year the exchange commenced. In addition, if the identification deadline has passed prior to the disaster date, the taxpayer is only eligible to modify a past identification statement if an identified property was damaged by the disaster.
It is recommended that taxpayers who choose to apply an extension to their exchange timeline consult with their advisor regarding potentially extending the due date to file their 2022 tax return. The passing of the tax filing date for 2022 would end an exchange that started in 2022. See our article for more information about extending your tax filing deadline in light of an exchange.
Extended tax filing due dates: the IRS Notice also provides relief to those taxpayers who already filed for an extension of the original deadline to file their tax returns:
“Under section 7508A, the IRS gives affected taxpayers until May 15, 2023, to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; annual information returns of tax-exempt organizations; and employment and certain excise tax returns), that have either an original or extended due date occurring on or after January 8, 2023, and before May 15, 2023, are granted additional time to file through May 15, 2023.”
The IRS Relief Notice covers specific counties impacted by the severe winter storms, flooding and mudslides. If additional relief is provided, or other areas added, we will update this article accordingly. The current list of eligible localities is always available on the disaster relief page on IRS.gov. Exchangers should also check specific state websites as individual states may issue their own relief guidance.
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 1031 qualified intermediary.
Disaster Relief and 1031 Exchanges
It is important for taxpayers who are utilizing a 1031 exchange (“Exchangers”) to understand the effects of Federally declared disasters, like the severe winter storms and flooding in California, on the strict deadlines for completing an IRC Section 1031 exchange.
For delayed or forward exchanges, the 1031 rules set two time periods (for a total deadline of 180 calendar days) in which 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 end of the 45-day identification period in which to purchase their identified replacement property or properties (totaling a 180-day period). Those Exchangers transacting a reverse exchange have 180 days to sell their relinquished property after the transfer of ownership of the parked property to an exchange accommodator.
In the event of a federally declared disaster, an Exchanger may be eligible for an extension of either the 45-day identification deadline, the 180-day period in which to complete an exchange, 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 qualifying disaster event, the IRS will publish a Disaster Relief Notice and other guidance generally available on the IRS website’s disaster resources page. For an Exchanger to qualify for an extension provided by an IRS Notice, the Notice must specifically mention Rev. Proc. 2018-58.
Extended Relief per Section 17 of Rev. Proc. 2018-58
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).
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. a reverse exchange) on or before the date of the federally declared disaster. However, it is important to note that a taxpayer can qualify for relief for a variety of reasons, including but not limited to: if the relinquished or replacement property is located in the Federally declared disaster area; if the principal place of business of any party to the transaction is located in the disaster area; if a lender will not fund the loan due to the disaster; or if 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 declared disaster. Therefore, at the discretion of the IRS, an Exchanger can potentially qualify for the 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. Based on the wording of the Revenue Procedure, we believe that the location of a party other than the Exchanger, by itself will likely not justify relief unless the transaction is also “substantially delayed.” Taxpayers who qualify for this form of relief should contact the IRS, as they generally will not receive automatic relief like the “affected taxpayers” defined in the Notice above.
- Tax Relief is automatic for affected taxpayers: “The IRS automatically identifies taxpayers located in the covered disaster area and applies filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area should call the IRS disaster hotline at 866-562-5227 to request this tax relief.” That being said, if an Exchanger believes they are entitled to an extension, they should promptly contact their 1031 qualified intermediary.
- Extended 1031 Exchange Relief per Rev. Proc. 2018-58, Section 17: This relief only applies where a 1031 exchange was commenced on or before the disaster date specified in the relevant IRS Notice.
- If you had a valid postponement of a deadline, but still receive a filing or penalty notice: “If an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date that falls within the postponement period, the taxpayer should call the telephone number on the notice to have the IRS abate the penalty.” . . . “Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case. Taxpayers may download forms and publications from the official IRS website, IRS.gov.”
- Ongoing Disasters and the minimum relief period: Pursuant to Treas. Reg. §301.7508A-1 (g), for disasters that span over multiple days or weeks, the IRS must provide a mandatory 60-day postponement period from the latest incident date specified in the disaster declaration. See e.g. (g)(4)(iii) “Wildfires.”
- Volunteers and taxpayers living outside the area may also be eligible for relief: “In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.” IRS Notice CA-2023-01.
 IRC §1031(a)(3)(B)(ii).
 “Federally declared disasters” = “Presidentially declared disasters.” Historically, IRS guidance referred to “Presidentially declared disasters” but Rev. Proc. 2018-58 implemented a change in terminology.
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