What starts the clock?
In an I.R.C § 1031 Exchange, there are two key time frames that must be at the forefront of your mind from the beginning. The first is the “Identification Period,” which is defined as beginning on the date the taxpayer transfers the relinquished property and ending at midnight on the 45thcalendar day thereafter. This officially begins on the day when the deed or other transfer document is recorded. In some cases tax payers will try to extend the 45/180 day period by delaying the recording of the deed. This is precarious and may not hold weight if reviewed as the ownership of real property (necessary in a 1031 exchange) is transferred upon the transfer of “benefits and burdens” of ownership, which is typically viewed as the when the deed is conveyed.
Secondly, at the point that that the deed or transfer document is recorded, the 180-day exchange period also begins to countdown. Keep in mind for both of these periods that these are calendar days and not business days, nor are they affected by holidays. Once this clock begins to tick there are only two exceptions to an otherwise inflexible time frame: a federally declared disaster or military service in a combat zone.
What extends the clock?
A “federally declared disaster” is defined in I.R.C §165(h)(3)(c) as “any disaster subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.” Furthermore, a natural catastrophe of any kind that the President deems to have the severity and magnitude that supplemental efforts and resources are required in a localized area can also be deemed a natural disaster. Most recently examples in 2017 include hurricanes Harvey, Irma and Maria, as well as the wildfires affecting California in 2018. The IRS keeps these declarations up to date on the Tax Relief in Disaster Situationsweb page. In some instances, terroristic or military actions could also be considered for a federally declared extension. The IRS will define which taxpayers are considered “affected,” and will describe which acts will receive an extension, including the duration and the specific covered disaster area.
If you are in an area affected by a federally declared disaster, section 17 of Rev. Proc 2007-56 provides provisions that specifically apply to I.R.C § 1031 exchanges. It’s important to note that provisions therein may be used in lieu of the provisions in the IRS guidance related to the natural disaster. In essence, if you have entered into a 1031 exchange in any form and your identification or exchange periods fall on or after the date that is published by the IRS, your clock is extended by 120 days or to the last day of the general disaster extension period as published by the IRS on “Tax Relief in Disaster Situations,” whichever is later. It is important to note that you may not postpone the period beyond the due date of the taxpayer’s tax return for the year of the transfer.
A taxpayer would qualify for this extension only if:
- The relinquished property was transferred on or before the federally declared disaster, or in the case of a Reverse Exchange, qualified indicia of ownership were transferred to the Exchange Accommodation Titleholder on or before the date.
AND
- They are considered an “affected taxpayer” as defined by the IRS or have difficulty meeting the 45-day identification or 180-day exchange deadline for the following reasons:
- The relinquished property or replacement property is located in the covered disaster area
- The principal place of business of any party to the transaction is located in the covered disaster area
- Any party to the transaction 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 due to the disaster
- A lender decides not to fund a closing either permanently or temporarily due to the disaster
- A title insurance company is not able to provide the required title policy necessary to settle or close the transaction due to the the disaster
As you can imagine, these situations can be very unique. If you find yourself in this unfortunate position, it would be wise to discuss Rev. Proc 2007-56 in greater detail with a Qualified Intermediary or your CPA.
The only other extension that is found in Section 7508 is related to Armed Services members who are serving in a combat zone or supporting an operation either through direct support to the combat zone or a contingency operation. Rev. Proc. 2007-56 provides that the time periods for a deferred exchange and a reverse exchange are postponed for military service in a combat zone. For example, if an individual commences military service on the 50thday of the exchange period, the exchange period would extend until the completion of their service and then 180 days thereafter, in addition to the remaining 130 days left from the original exchange period. In the case that you find yourself in this situation, make sure that your federal return including your 1031 exchange has “Combat Zone” in red at the top of the page.
As you can see, there is limited flexibility to extend the clock on your exchange outside of the two general options discussed. Outside of these two options the time periods are inflexible and should be viewed as such. Should you find yourself in this situation, hopefully you have a qualified intermediary who can help guide you through the process. If you are actively serving in our military or live in an area that is prone to natural disasters be sure to discuss your QI’s experience with these matters before beginning your exchange.
We Can Help
Atlas 1031 Exchange has been accommodating tax-deferred exchanges of all kinds for more than 17 years. We are fluent in the rules and regulations of IRC Section 1031 and able to help you navigate your exchange.
Contact us today to discuss any questions you may have. Call our office at 1-800-227-1031, email us at info@atlas1031.com, or submit your question through the online form at the top of this page.
