October 19, 2022
On September 17, 2022, Hurricane Fiona made landfall and severely impacted areas of Puerto Rico. Due to the damage, flooding, and disruption caused by the storm, the IRS issued tax relief to those who reside or have businesses in any of the 78 municipalities of Puerto Rico. IRS Notice PR-2022-10, dated September 19, 2022 (“IRS Notice”).
Individuals and households affected by Hurricane Fiona that reside or have a business in all 78 municipalities in Puerto Rico qualify for tax relief. The declaration permits the IRS to postpone certain tax-filing and tax-payment deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after September 17, 2022, and before February 15, 2023, are postponed through February 15, 2023.
The IRS Notice provides affected taxpayers with universal tax relief that extends the deadlines to file various individual and business tax returns and deadlines to make tax payments until February 15, 2023. The IRS Notice also covers other time-sensitive actions, including those in Rev. Proc. 2018-58, which covers the deadlines applicable to Section 1031 like-kind exchanges.
It is important to note that only foreign properties are considered like-kind to other foreign properties, and only like-kind properties are eligible for a valid exchange under IRC Section 1031. “No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment.” Puerto Rico is an unincorporated territory and is therefore not “like-kind” to U.S. real estate for purposes of Section 1031. For example, if a U.S. taxpayer exchanges a property in New York (domestic) for a property in Southeast Asia (foreign), the properties would not be considered like-kind to one another, and thus not qualify for tax deferral under IRC Section 1031; however, a U.S. taxpayer exchanging a property in Puerto Rico (foreign) for a property in Southeast Asia (foreign) generally would qualify for the tax benefits of Section 1031. Click here to read more about foreign like-kind exchanges and foreign investments.
In addition, it is important to note that a U.S. taxpayer domiciled in Puerto Rico could potentially qualify as an “affected taxpayer” even if the real estate involved in a pending 1031 exchange is located in the continental United States. Likewise, it is also important to note that a U.S. taxpayer domiciled in a state affected by a different disaster, like Hurricane Ian, may have multiple disaster relief options to consider with respect to an ongoing 1031 exchange.
An affected taxpayer transacting a 1031 exchange has two potential deadline extension options pursuant to the Federal relief. Dependent on when the exchange commenced, the taxpayer could qualify for one or both options detailed 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 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” and does not require an application, it is also elective, and Exchangers have discretion over whether to apply the relief. Impacted 1031 Exchangers who are not “affected taxpayers” may also qualify (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 the IRS Notice, aka “General Relief” or “Section 4 Relief”
|On or after date:||September 25, 2022||(Disaster Date per the Notice)|
|Extension date:||February 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 Notice) who have tax-related deadlines falling on or after the Disaster Date but prior to the Extension Date. The Notice also specifies 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.
2. Relief under Rev. Proc. 2018-58, aka “Section 17 Relief”
In addition to the above, there is another option for affected taxpayers who commenced a 1031 Exchange on or before the disaster date. Extended Relief pursuant to Section 17 of Rev. Proc. 2018-58, can apply to both 1031 exchange deadlines (45-day and 180-day) and is discussed in detail below:
|On or before date:||September 17, 2022|
|Section 17 extension date:||120 days added to each deadline|
|45-day identification deadline + 120 days|
|180th day +120 days|
|the General Relief in the Notice if that date is later (2/15/2023)|
Impacted 1031 Exchangers – It is important to note that under Section 17 of Rev. Proc. 2018-58, a taxpayer transacting a 1031 exchange who is domiciled outside of the disaster area can still qualify for relief for 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 upon the length of the Section 4 relief provided, an affected taxpayer who qualifies for deadline extensions pursuant to both Section 4 and Section 17 may choose which extension to apply, or whether to apply for any extension at all. Often the ultimate choice rests on the potential to identify and acquire suitable replacement property in one of the strict time frames: either under the original exchange deadlines, or as extended by Section 4 or 17. It should also be noted when making this decision that an extension/end of the identification deadline can affect the timing by which an intermediary can release any remaining exchange funds back to the taxpayer; for this reason, the decision to extend or not is largely a business decision.
NOTE: A deadline cannot be extended for more than one (1) 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 typically only eligible to modify a past identification statement if the identified property was substantially damaged by the disaster.
It is recommended that taxpayers who decide to apply an extension to their exchange timeline consult with their tax or legal advisor regarding potentially extending the due date to file their 2022 tax return. Exchanges that commenced prior to the disaster date for Hurricane Fiona could have an extended deadline that extends past the deadline for filing 2022 taxes. The passing of the tax filing date for 2022 would end an exchange that started in 2022 [§1031(a)(3)(B)(ii)]. 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 had filed for an extension of the original deadline to file their tax returns.
“This means individuals who had a valid extension to file their 2021 return due to run out on October 17, 2022, now have until February 15, 2023, to file. The IRS noted, however, that because tax payments related to these 2021 returns were due on April 18, 2022, those payments are not eligible for this relief.”
The IRS Notice covers a significant area impacted by Hurricane Fiona in Puerto Rico. 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 state websites as individual states may issue their own relief guidance.
Eligibility for disaster extensions 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 hurricane in Puerto Rico, 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, 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 period of 180 days). 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. These publications specify which counties or states have been affected, and the type/duration of relief provided.
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 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 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 do 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.”
- 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.
- Estimated Tax Payments: An important consideration for those taxpayers who have valid filing extensions is that filing extensions do not extend payment deadlines. If a taxpayer’s filing deadlines were originally extended until September 15, 2022 (partnerships) or October 17, 2022 (individuals) and are now extended further to February 15, 2023, they should consider making estimated payments to avoid interest and penalties.
- 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, many taxpayers living outside the disaster area may also qualify for relief. This includes those assisting with disaster relief and taxpayers whose records necessary to meet a filing or payment deadline postponed during the relief period, are located in the disaster area. Eligible individuals and businesses located outside the disaster area can request relief by calling the IRS disaster hotline at 866-562-5227.” IR-2022-156.
 Internal Revenue Code Section 1031(h) provides the special rule for foreign real estate: “Real property located in the United States and real property located outside the United States are not property of a like kind.”
 26 U.S. Code § 1031(a)(1).
 Please note that for business entities that are s-corps and tax partnerships that are calendar-year taxpayers and have returns due September 15, 2022 (the original filing date pursuant to an extension), that date would also be extended to February 15, 2023.
 “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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