IRS Disaster Relief Available on Section 1031 Exchanges

Due to the impact of Hurricane Helene throughout the southern part of the United States, the IRS has announced relief available to taxpayers located in impacted areas. This relief includes an extension for taxpayers who are in the process of completing Section 1031 exchange transactions in the form of an extension of the 45-day and 180-day key deadlines.

Extension of Section 1031 exchange deadline requirements

The requirements for a valid 1031 exchange require you to identify a replacement property within 45 days of the transfer of relinquished property and close on the replacement property within 180 days of the sale of the relinquished property.

The recently issued IRS relief will extend both deadlines to May 1, 2025, if the original 45- or 180-day deadlines were before the “disaster date.” The disaster dates for each state are:

• Alabama — September 22, 2024
• Florida — September 23, 2024
• Georgia — September 24, 2024
• Virginia, North Carolina, and South Carolina — September 25, 2024
• Tennessee — September 26, 2024

Covered disaster areas and affected taxpayers

A taxpayer is considered an “affected taxpayer” if they are an individual or business whose principal location is located within a covered disaster area. While this is the general qualification, there are many ways you can be considered an affected taxpayer. Consult your tax advisor if you think the disaster impacts you but you are not located in a covered disaster area. See the full listing of covered disaster areas that qualify for relief.

It’s also important to note that affected taxpayers located in covered disaster areas are entitled to relief regardless of where the replacement property or relinquished property is located.

Extension options

Revenue Procedure 2018-58 provides two different sections that can be relied on in these situations.

• Section 6 — This section applies to affected taxpayers only. Any 45- or 180-day deadline that falls on or after the disaster date above is postponed, which in this case would be May 1, 2025.
• Section 17 — This section is applicable to both affected taxpayers and other taxpayers who have difficulty meeting the 45-day or 180-day exchange period deadline due to a federally declared disaster.

Examples of potential difficulties include whether the relinquished or replacement property is located in a covered disaster area, a party of the transaction is killed, injured, or missing as a result of the disaster, or the disaster causes third parties like lenders or insurance companies to back out of the deal due to the disaster.

Taxpayers who qualify for relief under this section postpone the 45-day or the 180-day to the later of the last day of the general disaster extension period (in this case May 1, 2025) or 120 days from the original deadline.

Note that with Section 17, the relinquished property must have been transferred on or before the date of the federal declared disaster and the postponement period may never extend beyond the due date, including extensions, of the return year of the transfer or one year.

How we can help

Section 1031 exchange transactions can be confusing on their own but can get even more complicated when these situations come into play. If you are involved in a Section 1031 exchange transaction and believe you qualify as an affected taxpayer, reach out to your tax advisor for further information as soon as possible.

CLA has qualified tax professionals who specialize in 1031 exchange transactions and consulting and can help advise on your transactions from start to finish.

Note: the IRS may update the extensions or add more disaster areas to the relief without issuing a new notice. Check the IRS websites periodically for updates if this situation impacts you.