Important News About Tax Relief In Hurricane Ian Disaster Areas

The IRS has authorized deadline extensions for taxpayers with 1031 exchanges that have been or may be impacted by Hurricane Ian. This affects taxpayers doing 1031 exchanges anywhere in the states of Florida, North Carolina, or South Carolina (“Disaster Area”). This extension applies to investment property sold, identified as a potential replacement, or purchased as part of a 1031 Exchange in any of these states. If you meet the definition of “affected taxpayer”, the IRS is offering you tax relief with the option to extend both the 45-day and 180-day 1031 Exchange deadlines.

1031 Exchange Deadlines

To qualify for the tax deferral offered by a 1031 Exchange, a real estate investor must identify potential replacement properties within 45 days of the sale of their relinquished property. They then have an additional 135 days, for a total of 180 days, to complete their purchase of the identified property. In a reverse exchange, the investor has 180 days to sell their relinquished property after their qualified intermediary takes ownership of their replacement property via an Exchange Accommodating Titleholder.

The federally declared disaster of Hurricane/Tropical Storm Ian has resulted in the IRS’ publication of Disaster Relief Notices for each Disaster Area. Among universal tax relief, 1031 Exchange deadlines have been given the option to extend.

Affected Taxpayer

An affected taxpayer is an individual or household who resides or has a business anywhere in the Disaster Area. In addition, the IRS Notices also state that “taxpayers not in the covered disaster area, but whose records necessary to meet a deadline listed in Treas. Reg. § 301.7508A-1(c) are in the covered disaster area, are also entitled to relief.” This means that affected exchangers residing outside the Disaster Area may qualify for tax relief if they began an exchange impacted by the disaster prior to the “Disaster Date”. For example, an exchanger in California with an exchange in progress on or before the disaster date whose identified replacement property in Florida was damaged in the disaster prior to its purchase.

Disaster Date 

As Hurricane Ian caused damage over an extended period, each Disaster Area has its own Disaster Date. This is the date on which the tax relief is keyed. The dates are as follows:

Two Extension Options

The IRS’s Disaster Relief notice, in conjunction with their Revenue Procedure 2018-58, gives taxpayers two options to extend their exchange deadlines. There is both a general relief option (exchanges in progress on or after the Disaster Date) and an extended relief option (exchanges in progress on or before the Disaster Date). Depending on when your exchange began, you may qualify for one or both of these options.

General relief 

The general relief option is available to affected taxpayers who live or have a business in any of the Disaster Areas. This extension extends the 45-day and the 180-day deadline for any exchange started on or after the Disaster Date for their Disaster Area to February 15, 2023. Despite its automatic availability, affected taxpayers may or may not choose to exercise this option to extend based on their personal circumstances.

Extended relief 

The extended relief option is available to exchangers who had an active exchange in process on or before the Disaster Date, regardless of whether or not they reside or own a business in the Disaster Area. This extension extends the 45-day and the 180-day deadline for any exchange started on or before the Disaster Date for their Disaster area by 120 days or until February 15, 2023, whichever is longer. Affected taxpayers who qualify for this type of extension include anyone with an exchange in progress in the Disaster Area or who lives or has a business there. 

Exchangers who both had an exchange in process on or before the Disaster Date AND live or own a business in the Disaster Area may elect either the General or Extended Relief option.

Extensions Are Elective

Even if you meet all of the criteria for the offered extensions, it is up to you whether or not you will take advantage of this relief. While extending the deadlines may provide you with additional time to identify and purchase suitable replacement property, it may also impact when your qualified intermediary can release any remaining exchange funds. Carefully reviewing your situation and alternatives with both your qualified intermediary and your tax professional is critical to making an informed decision.

Accessing This Tax Relief

According to the IRS Notices, “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.”

Keeping Current

This disaster has impacted a significant area, and the IRS Relief Notices expanded from specific counties to entire states. A current list of eligible areas is available on the IRS’s disaster relief page. In addition, individual states may also issue their own relief guidance, so exchangers should check state websites.

Conclusion

Exchangers should consult with their tax advisors and review the IRS guidance regarding this disaster relief carefully before making any determinations. You may be eligible for this tax relief, even if you are located far from the disaster area.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.