Federally Declared Disasters & 1031 Exchange Extensions

On February 19th, the severe winter weather experienced by the state of Texas was formally declared a Federal Disaster by the Federal Emergency Management Agency (FEMA). In situations like these, the IRS often issues relief to affected taxpayers in the form of extended deadlines, waived fees, and relaxed requirements.

 The ongoing Covid-19 pandemic has provided some recent examples of this type of IRS relief in the form of IRS Notice 2021-10, Notice 2020-39, and Notice 2020-23, which extended 1031 exchange, QOZF, and other tax deadlines (we’ve covered those deadline extensions in detail here, here, here, here, and here).

 Deadlines Extensions for Exchangers

The recent disaster in Texas is no different. On February 22nd the IRS issued Notice TX-2021-02, providing tax relief for Texas taxpayers. This notice extended deadlines falling between February 11th and June 15th, to June 15, 2021. For property owners performing 1031 exchanges it is important to understand how this can impact the various timelines involved in their transaction.

In the traditional forward exchange, an Exchanger has 45 days from the date of sale to identify potential replacement properties. The Exchanger then has an additional 135 days to close one or multiple of the identified properties (1031 ID Rules) for a total potential exchange window of 180 days.

 In the case of federally declared disasters, the Exchanger may receive an extension of either or both of those deadlines. Deadline extensions and other IRS Notices will be posted on the IRS website - https://www.irs.gov/newsroom/tax-relief-in-disaster-situations – and will specify what areas and taxpayers qualify. For the extension to apply, the exchange must have been initiated on or before the date of the federally declared disaster.

 Important to note, however, that there are several ways through which an Exchanger can qualify for Disaster tax relief even if they themselves are not located in the affected areas:

1. The relinquished property or the replacement property is located in the covered disaster area
2. The principal place of business of any party to the transaction – QI, closing attorney, lender, financial institution, or a title insurance company – is located in the covered disaster area
3. A lender decides not to fund due to the disaster
4. A lender decides not to fund because flood, disaster, etc. insurance is not available due to the disaster
5. A title insurance company is not able to provide the insurance policy necessary to settle the transaction due to the disaster

The DST – A Passive 1031 Exchange Replacement Options

For those exchangers unable to find a suitable replacement property to complete their exchange - whether due to a disaster or current market conditions – passive investment through the Delaware Statutory Trust may be an option.

The Delaware Statutory Trust is a 1031 exchange compatible, passive investment vehicle through which investors purchase beneficial interests in institutional real estate assets. These DST’s can contain anything from a Class A multifamily property, to a portfolio of self-storage, to a single NNN industrial warehouse, and almost anything in between. The DST’s are managed by large, reputable real estate companies and provide the potential for investors to participate in the cash-flow and appreciation of the underlying investment real estate.

 If you have any questions about 1031 exchange replacement options, capital gains tax-deferral strategies, or commercial real estate investment, please don’t hesitate to reach out to our team at Fortitude or visit our websites - 1031Custom.com - 1031DST.com

 This is for informational purposes only, does not constitute as individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor.

There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Potential cash flow, returns and appreciation are not guaranteed. IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your particular situation. This is not a solicitation or an offer to sell any securities. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney.

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA) Fortitude Investment Group is independent of CIS, CAM, and CIA.