The wildfires in the Los Angeles area and other parts of Southern California have given rise to a lot of questions from insurance to real estate transactions that have been interrupted by this huge tragedy. One type of transaction impacted is the 1031 exchange. Fortunately, the IRS has extended the 40-day and 180-day deadlines for this type of transaction for those affected by the fires, said Ron Ricard, vice president of IPX 1031.
A 1031 exchangeallows an investor to sell a property, reinvest the proceeds from the sale in a "like kind" property that is of equal or greater value and defer all capital gain taxes. Under normal conditions, sellers can defer paying capital gains taxes on the sale of a property if, within 45 days of closing, they identify a replacement property and are able to close on that property within 180 days from the original sale.
At a recent meeting of the Silicon Valley Association of Realtors, Ricard told members, composed of both Realtors and affiliated professionals, that sellers cannot request 1031 deadline extensions for personal reasons, such as but the IRS has the ability to provide extensions to the 45-day and 180-day requirements during federal declared disasters and only in counties/areas affected by the disasters. He said the agency has granted the extension only four times in California.
"The extension gives qualifying taxpayers a much longer period to identify replacement property. It's been a challenge finding good replacement property in Southern California due to the wildfires," said Ricard.
The current extensions permit affected persons who began a 1031 exchange between Nov. 23, 2024 and Jan. 7, 2025, to extend the 45-day identification of replacement property period to Oct. 15, 2025, regardless of where the relinquished property or replacement property is located. The extensions also permit affected persons who began a 1031 exchange between July 11, 202 and Jan. 7, 2025, to extend the 180-day exchange period to the later of Oct. 15, 2025, or 120 days after the original 180-day deadline date.
Affected persons include those individuals residing in an area designated by the Federal Emergency Management Agency (FEMA) as a "Covered Disaster Area." This area currently encompasses all of Los Angeles County and also applies to taxpayers who have difficulty meeting the deadlines during the disaster, including any individual whose principal residence is located in the "Covered Disaster Area" or those who have selected or had planned to select replacement property in the "Covered Disaster Area."
Those involved in a 1031 exchange who do not meet the criteria of an affected taxpayer can still qualify for the extension if they would have difficulty meeting the standard 45-day or 180-day deadline. In such cases, taxpayers must have transferred their relinquished property on or before Jan. 7, 2025.
Ricard also spoke on using a 1031 exchange to improve property and reverse exchanges, which are complicated and expensive but becoming popular. Ricard, likewise, reminded members that important provisions included in the Tax Cuts and Jobs Act (TCJA) are set to expire after 2025. "At this time there has been nothing formally proposed, but I expect some discussion in the spring. The good news is we do not expect it to affect 1031 exchanges," he said.
The certified exchange specialist said the elimination of the 1031 exchange has been proposed in the past, and while personal property is now excluded in such transactions, "common sense has prevailed," said Ricard. "1031 exchanges are still a key transaction. The key takeaway is expect some legislation this year."
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