This important information is brought to you by the FEA Member Services Committee, Tax Update Subcommittee with special thanks to Richard Goodman.

I.R.S. Extends Section 1031 Deadlines for Hurricane Victims and Certain Other Taxpayers
 
by
Richard A. Goodman   

             The IRS recently issued Notice 2005-3, which grants to victims of Hurricanes Charley, Frances, Ivan and Jeanne, and Tropical Storm Bonnie (the “Hurricanes”) as well as to other specified taxpayers extensions of certain deadlines affecting their tax-deferred exchanges.

Section 1031 imposes numerous deadlines (the “1031 Deadlines”). In forward deferred exchanges, the taxpayer must identify the replacement period by the 45th day after transferring the relinquished property (the “45-Day Identification Period”) and must receive the replacement property by the earlier of the 180th day after the taxpayer transfers the relinquished property (the “180-Day Exchange Period”) or the due date of the taxpayer’s return (the “Due Date of Return Exchange Period”). In reverse exchanges, the safe harbor set forth in Rev. Proc. 2000-37 is available only if the taxpayer complies with a 5-Business Day Period for entering into a qualified exchange accommodation agreement, a 45-day Identification Period, a 180-Day Exchange Period and a 180-Day Combined Time Period (collectively referred to as the “Safe Harbor Periods”).

            Taxpayers serving in the military automatically receive a postponement of certain tax deadlines pursuant to Section 7805. Similarly, Section 7805A authorizes the IRS to grant extensions to taxpayers affected by a Presidentially declared disaster. Neither section, however, provides extensions for any of the 1031 Deadlines.

Early last year, the IRS issued Rev. Proc. 2004-13, which contained an updated list of deadlines which could be postponed under sections 7508 and 7508A. That list included some but not all of the 1031 Deadlines: the 45-Day Identification Period, the 180-Day Exchange Period and the Due Date of Return Exchange Period. Rev. Proc. 2004-13 did not automatically grant extensions to the victims of Presidentially declared disasters but provided, instead, that the IRS first must issue a news release for the particular disaster. The IRS subsequently issued the required news releases as to the Hurricanes (the “News Releases”).

However, Rev. Proc. 2004-13 and the News Releases left the Hurricane victims with a number of postponement issues. First, no extensions were granted for the Safe Harbor Periods applicable to reverse exchanges. Second, the deadlines were extended only until December 30, 2004. Finally, no extension was allowed as to the 45-Day Identification Period where previously identified replacement property was destroyed or severely damaged in one of the Hurricanes.

The IRS now has addressed these issues in Notice 2005-3 which liberalizes Rev. Proc. 2004-13 as follows:

o        It expands the list of time-sensitive acts to include the Safe Harbor Periods for reverse exchanges;

o        It permits a 120-day postponement if, for certain specified reasons, the taxpayer has difficulty meeting the deadlines for either the 45-Day Identification Period or the 180-Day Exchange Period (as to a forward deferred exchange) and all of the Safe Harbor Periods (as to a reverse exchange); and

o        It permits a 120-day postponement of the 180-Day Exchange Period if, after the end of the 45-Day Identification Period, the identified replacement property (or, in a reverse exchange, the identified relinquished property) is substantially damaged.

Notice 2005-3 is applicable to acts which were required to be performed on or after January 26, 2004.

Since the rules of Notice 2005-3 are highly technical, victims of the Hurricanes and others seeking to utilize it should seek professional advice to make certain that they are eligible for its benefits.

  Richard A. Goodman is a partner in Goodman & Levine LLP with offices in Oakland, California. He is the author of Real Property Exchanges (CEB 1982) as well as numerous articles on tax-deferred exchanges. This summary is not intended to provide legal or tax advice and every taxpayer should consult with a tax advisor as to the applicability of the rules discussed to the taxpayer’s particular situation