How does a presidentially declared disaster benefit a 1031 exchange? Revenue Procedure 2007-56 provides: (1) a time extension of either 120 days or to the last day of the authorized general extension period, whichever is later; (2) extensions to the reverse exchange deadlines; and (3) clarifies who would qualify for the extensions. The additional time is added on to the last day of the applicable 45-day identification period or 180-day exchange period for both forward and reverse exchanges. The 120-day extension also applies to the 5-day timeframe taxpayers have to enter into a qualified exchange accommodation agreement when doing a reverse exchange. The time extension applies if the last day of the relevant time period falls on or after the date of the declared disaster. For example, if the IRS issues a Notice specifying that a presidentially declared disaster began on October 1st, then any applicable time frames that began prior to this date but expired on or after the 1st would be extended.
Specific criteria must be met in order for the taxpayer to benefit from the time extension. The Revenue Procedure provides that an affected taxpayer qualifies for a postponement of the deadlines only if:
The relinquished (sold) property was transferred on or before the date of the declared disaster or the transfer to the exchange accommodation titleholder was completed in a reverse exchange before that date. The following other issues are considered if the exchangor has difficulty in meeting the deadlines because:
- The relinquished or replacement property is located in the disaster area;
- The principal place of business of any party to the transaction is located in the disaster area;
- Any party to the transaction (or an employee involved in the exchange) is killed, injured, or missing as a result of the disaster;
- A document prepared in connection with the exchange or a relevant land record is destroyed, damaged or lost as a result of the disaster;
- A lender decides not to fund the loan or is unable to fund the loan due to a lack of flood or hazard insurance; or
- A title company cannot provide title insurance due to the disaster. The 120 day extension also applies if an already identified replacement property or an identified reverse exchange relinquished property is substantially damaged in the disaster.
The time extensions do not automatically apply to any disaster; they only apply if the IRS issues a Notice or News Release and if the taxpayer falls within the designated criteria. Historically, these notifications have been rare. However, in the last few years, there have been numerous news releases granting extensions to taxpayers affected by weather events, including relief for Hurricane Irene. For more information see: http://www.irs.gov/newsroom/article/0,,id=108362,00.html
