On September 28, 2022, Hurricane Ian made landfall on the west coast of Florida as a category 4 storm, causing significant destruction. It then made landfall again, causing damage across South Carolina and North Carolina. In response, the Federal Emergency Management Agency (FEMA) issued disaster declarations for each of these states. The IRS also announced several tax relief measures for affected taxpayers, including extensions of the 45-day and 180-day rules for those engaging in a 1031 exchange.

Individuals who lost investment properties due to the impact of Hurricane Ian also have the option to defer capital gains and depreciation recapture taxes by taking advantage of a 1033 exchange. Here’s a closer look at each option. 

1031 Exchange Deadline Extensions

The deadline extension for 1031 exchanges applies to all “affected taxpayers.” This includes individuals who live in and companies that have their principal place of business in any state that has been declared a disaster area (currently Florida, South Carolina, and North Carolina).  

All affected taxpayers are entitled to the deadline extension regardless of where the replacement and relinquished properties are located. There is also no need to apply for an extension, as it is automatically granted if you have an address on record in one of the named states. 

Extension Option 1: Section 6

Section 6 is available to affected taxpayers only and applies regardless of whether the exchange began before or after the disaster date. In this case, if the 45-day or 180-day deadline falls on or after the disaster date, it is now postponed to the general postponement date, which is February 15, 2023. 

The disaster date for each state is as follows:

• Florida – September 23, 2022
• South Carolina – September 25- 2022
• North Carolina – September 28, 2022
  
  

Extension Option 2: Section 17 Alternative

The second option is available to both affected taxpayers and others who are having difficulty meeting their deadlines due to the effects of Hurricane Ian. If the relinquished property was transferred on or before the disaster date and the 45-day or 180-day deadline falls on or after the disaster date, the deadline is extended by either an additional 120 days or to the general postponement date, whichever is longer. 

Section 1033 Exchange 

When a property is destroyed by a hurricane or other natural disaster, it’s common for the property owner to eventually receive a check from their insurance company. In most cases, the difference between the property’s depreciated cost basis and the settlement amount would be taxable as realized capital gains. The property owner would also have to pay taxes on recovered depreciation. However, you could defer these taxes by engaging in a 1033 exchange. 

A 1033 exchange is similar to a 1031 exchange, but the guidelines are a little more relaxed compared to a 1031 exchange. While a 1031 exchange requires you to use a Qualified Intermediary (QI) and identify a replacement property within 45 days, a 1033 exchange does not require a QI and generally allows a minimum of two years to reinvest the sales proceeds. There are also no limits to the number of replacement properties you can consider and no formal identification requirements. 

Section 1033 exchanges are available to owners of properties that have been destroyed by a hurricane, earthquake, fire, or another disaster, as well as those that have been taken through eminent domain.

When completing a 1033 exchange after a disaster, you are required to choose a replacement property that is “similar or related in service or use.” Generally, if the original property was an apartment building, you would not be allowed to replace it with a restaurant or a parking garage. 

However, if the property was located in a federally declared disaster area, then the more liberal “like-kind” replacement standard applies. In this case, virtually every type of investment property in the U.S. is considered “like-kind” to every other type of investment property in the U.S. Since Florida, South Carolina, and North Carolina have been officially declared disaster areas by FEMA, this standard now applies. 

Explore Your Options 

If you’ve been affected by the aftermath of Hurricane Ian, now is the time to start exploring your tax relief options. The professionals at Fortitude Investment Group are here to help. Contact us today to schedule a consultation. 

Learn More About 1033 Exchanges!

Because investor situations and objectives vary this information is not intended to indicate suitability for any individual investor.  

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. 

Diversification does not guarantee a profit or protect against a loss in a declining market.  It is a method used to help manage investment risk.

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. Past performance is not a guarantee of future results.  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.