1031 Exchange Update – Tax Relief for areas affected by Hurricane Ida: NY, NJ, PA, LA, and MS and Tax Relief for areas affected by the California Wildfires

Updated October 26, 2021
By: James T. Walther, Esq., LL.M.
General Counsel, Legal 1031 Exchange Services, LLC

Hurricane Ida – Tax Relief for affected taxpayers in
New York, New Jersey, Pennsylvania, Louisiana, and Mississippi

Hurricane Ida made landfall on August 29th, 2021, and severely impacted those living in several Gulf States and the Eastern United States. Because of the damage and disruption caused by this historic storm, the IRS has issued tax relief to those who reside, or who have businesses located in specified FEMA disaster areas. Currently, the IRS has published Relief Notices for certain geographic areas of New York, New Jersey, and Pennsylvania, and for the states of Louisiana, and Mississippi (“Notices”).

The Notices extend the deadlines to file various individual and business tax returns and make tax payments for affected taxpayers. The Notices also cover other time sensitive actions, including those in Rev. Proc. 2018-58, which covers the deadlines applicable to Section 1031 like-kind exchanges. It remains to be seen if other areas will be provided disaster relief. If additional relief is provided, we will update this article accordingly.

New York: On September 9, 2021, the IRS published Notice NY-2021-01 (the “NY Notice”). The NY Notice provides tax relief for affected taxpayers located in Bronx, Dutchess, Kings, Nassau, New York, Orange, Putnam, Queens, Richmond, Rockland, Suffolk, Sullivan, Ulster, and Westchester counties.  [Updated 9/10 to include Nassau County,  9/14 to include Suffolk and Sullivan County, and 9/24 to include Dutchess, Orange, Putnam, Rockland, and Ulster counties].

For “affected taxpayers” as defined in the NY Notice: “certain deadlines falling on or after September 1, 2021, and before January 3, 2022, are postponed through January 3, 2022.”

New Jersey: On September 9, 2021, the IRS published Notice NJ-2021-01 (the “NJ Notice”). Individuals and households affected by Hurricane Ida that reside or have a business in Bergen, Essex, Gloucester, Hudson, Hunterdon, Mercer, Middlesex, Morris, Passaic, Somerset, Union, and Warren counties qualify for tax relief. [Updated 9/10 to include Essex, Hudson, Mercer, and Union counties, updated 9/14 to include Morris County and updated 9/22 to include Warren County].

For “affected taxpayers” as defined in the NJ Notice: “certain deadlines falling on or after September 1, 2021, and before January 3, 2022, are postponed through January 3, 2022.”

Pennsylvania:  On September 14, 2021, the IRS published Notice PA-2021-05 (the “PA Notice”). Individuals and households affected by Hurricane Ida that reside or have a business in Bedford, Bucks, Chester, Dauphin, Delaware, Fulton, Huntingdon, Luzerne, Montgomery, Northampton, Philadelphia, Schuylkill and York counties qualify for tax relief. [Updated 9/27 to include Bedford and Northampton counties, updated 10/15 to include Fulton, Huntingdon, Luzerne and Schuylkill counties, updated 10/20 to include Dauphin County.]

For “affected taxpayers” as defined in the PA Notice: “certain deadlines falling on or after August 31, 2021, and before January 3, 2022, are postponed through January 3, 2022.”

*Note the one day difference in disaster date from PA counties in the same vicinity.

Louisiana: On August 31, 2021, the IRS published Notice LA-2021-04 (the “LA Notice”), which provides tax relief for affected taxpayers located in the federally declared disaster area due to Hurricane Ida. The declaration initially covered certain parishes in Louisiana, but it was later expanded to include the entire state.

For “affected taxpayers” as defined in the LA Notice: “certain deadlines falling on or after August 26, 2021, and before January 3, 2022, are postponed through January 3, 2022.”

Mississippi: On September 10, 2021, the IRS published Notice MS-2021-02 (the “MS Notice”). This Notice indicates that Mississippi taxpayers will be eligible for similar tax relief to that provided by the LA, NY, and NJ Notices. However, the extension of time is much shorter.

For “affected taxpayers” as defined in the MS Notice: “certain deadlines falling on or after August 28, 2021, and before November 1, 2021, are postponed through November 1, 2021.”

Per the NY, NJ, PA, and LA Notices, affected taxpayers who had a valid extension in effect to file their 2020 tax returns on September 15th (partnerships) or October 15th (individuals), will now have until January 3, 2022, to file. Per the MS Notice, those MS affected taxpayers will have until November 1, 2021, to file. However, those taxpayers should read the Note below titled “Estimated Tax Payments.”

California Wildfires – Tax Relief for affected taxpayers in specific counties

On August 27, 2021, the IRS published Notice CA-2021-03 (the “CA Notice”), which provides tax relief for affected taxpayers located in counties that have been severely affected by Wildfires that began on July 14, 2021. “Individuals and households affected by wildfires that reside or have a business in Lassen, Nevada, Placer, Plumas, Tehama and Trinity counties qualify for tax relief.” [Updated 9/22 to include Tehama and Trinity counties.]

The scope of the tax relief in the CA Notice is like the Hurricane Ida relief but applies to a different timeline. The CA Notice extends “certain deadlines falling on or after July 14, 2021, and before November 15, 2021, are postponed through November 15, 2021. … “This means that individuals who had a valid extension to file their 2020 returns, due to run out on October 15, will now have until November 15, 2021, to file.”

The CA 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.

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 Hurricane Ida and the California Wildfires on the strict deadlines for completing an IRC Section 1031 exchange.1

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 close of the identification period in which to close escrow on at least one identified property (total 180-day period). Those Exchangers transacting a reverse exchange get 180-days to sell parked property after the transfer of ownership to an exchange accommodator.

In the event of a federally declared disaster, an Exchanger may be eligible for an extension of either deadline, 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 specific disaster event, the IRS will publish a Disaster Relief Notice and other guidance generally available on the IRS website’s disaster resources page. For Exchangers to obtain extensions, the notice must specifically mention Rev. Proc. 2018-58.

These publications specify which counties or states have been affected and the type and 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).2

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, note that a taxpayer can qualify for “hardship” 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 funded 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 Rev. Proc., we believe that the location of a party by itself will not justify relief absent other hardship that substantially delayed the transaction.

Recently, there has been some debate as to the application of IRS Notices that mention Rev. Proc. 2018-58 in whole, but do not specifically mention Section 17. For additional background please see our Disaster Resource Webpage at Legal 1031.com.

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 Section 1031 qualified intermediary.

Notes:

• 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.

• If you had a valid postponement of a deadline, but still receive a filing or penalty notice in the future: “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. For information on services currently available, visit the IRS operations and services page at IRS.gov/coronavirus.”

• 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, 2021 (partnerships) or October 15, 2021 (individuals) and are now extended further, they should consider estimated payments to avoid interest and penalties.

• Volunteers and taxpayers living outside the area may also be eligible for relief: from IR 2021-175 “In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.”

_________________

1 “Federally declared disasters” = “Presidentially declared disasters.” Historically, IRS guidance referred to “Presidentially declared disasters” but Rev. Proc. 2018-58 implemented a change in terminology.

2 Available at: https://www.irs.gov/pub/irs-drop/rp-18-58.pdf.

 

For the most up to date information on disasters see here:

 

Legal 1031 does not provide tax or legal advice, nor can we make any representations or warranties regarding the tax consequences of any transaction. Taxpayers must consult their tax and/or legal advisors for this information. Unless otherwise expressly indicated, any perceived federal tax advice contained in this article/communication, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein..

Copyright © 2021 Legal1031 Exchange Services, LLC. All rights reserved. No rights claimed with respect to public domain and fair use materials contained or linked in this article.

Disclaimer: This article may be considered Attorney Advertising, per Rule 7.1(f) of the New York State Rules of Professional Conduct.