Post Hurricane Updates – Investment Cleanup Part 2- §1031 Exchanges

The stress on indi­vid­u­als deal­ing with pri­ma­ry res­i­dences was touched on in part 1.  Investors in the mid­dle of a 1031 tax deferred exchanges are also affect­ed by the hur­ri­cane and may be han­dling dam­ages as well as IRC time restric­tions.

Octo­ber 20, 2024

By Al DiNi­co­la, AIF®, CEPA™
DST 1031 Spe­cial­ist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC Mem­ber of FINRA/SIPC

Investors who have owned rental prop­er­ties we’ll be faced with the elim­i­na­tion of cash flow or income if the prop­er­ty has been affect­ed. Some investors may have had busi­ness inter­rup­tion insur­ance which could reduce the poten­tial loss. How­ev­er, prop­er­ties dam­aged or destroyed do face the chal­lenges of rebuild­ing. This strain on the con­struc­tion indus­try is two-fold. There is the acces­si­bil­i­ty of mate­ri­als in any giv­en area as well as the abil­i­ty to have the work­force mobi­lized in any giv­en area. Acces­si­bil­i­ty to these areas, espe­cial­ly in parts of North Car­oli­na increas­es the con­cerns on how to rebuild.

Man­age­ment com­pa­nies through­out the effec­tive areas to have the respon­si­bil­i­ty and oblig­a­tions to update investors on the sta­tus of the prop­er­ty they man­age on behalf of investors. As finan­cial advi­sors who have assist­ed investors in past exchanges uti­liz­ing Delaware Statu­to­ry Trust (DST), we are aware of the geo­graph­ic loca­tions of the under­ly­ing prop­er­ties. For the most part all the prop­er­ty man­agers for the DSTs have reached out via e‑mail to all the investors pro­vid­ing a sta­tus of the con­di­tion of the prop­er­ty. Pas­sive investors rely on site man­age­ment com­pa­nies to keep them apprised of the con­di­tion of their prop­er­ty and the effects of the storms on these prop­er­ties. We want to empha­size again that these are finan­cial issues which are pale when com­pared to the cat­a­stroph­ic loss­es that indi­vid­u­als have expe­ri­enced.

There may be investors who were in the mid­dle of a §1031 exchange that may be seek­ing relief on the restric­tions in time peri­ods. If the prop­er­ty is part of a 1031 exchange and dam­aged, the pro­cess­ing of insur­ance claims may take the longest because of the thou­sands of peo­ple that have been affect­ed by the storms. In Part 3 we will touch on Sec­tion 1033 of the Inter­nal Rev­enue Code which address­es poten­tial options investors may have if their prop­er­ties have been destroyed by the hur­ri­cane.

Sec­tion 1031, which per­mits kind exchanges, does have spe­cif­ic require­ments regard­ing the finan­cial aspects of the poten­tial tax deferred exchange but more impor­tant­ly there are tim­ing require­ments for the exchange.  Well doc­u­ments arti­cles includ­ing many of our arti­cles stress the strict adher­ence to iden­ti­fy­ing the replace­ment prop­er­ties with­in 45 days from clos­ing on the relin­quished prop­er­ty.  In addi­tion, the investor needs to close on the iden­ti­fied prop­er­ty by the end of 180 days on the close on the relin­quished prop­er­ty.

Deci­sions that will need to be made by all investors may start with who do we turn to for advice. When there is a rul­ing from the IRS regard­ing any exten­sion to the time peri­od the exten­sions are very spe­cif­ic to affect­ed tax­pay­ers as well as spe­cif­ic dis­as­ter area.  The spe­cif­ic dis­as­ter area is typ­i­cal­ly a coun­ty.

First affect­ed tax­pay­er: “Affect­ed Tax­pay­er” includes indi­vid­u­als who live, and busi­ness­es whose prin­ci­pal place of busi­ness is locat­ed in, the Cov­ered Dis­as­ter Area. Affect­ed Tax­pay­ers are enti­tled to relief regard­less of where the relin­quished prop­er­ty or replace­ment prop­er­ty is locat­ed.

Since the begin­ning of August 2024 there have been three named storms hit­ting the south­east US. The IRS has been very busy estab­lish­ing a long list of exten­sions. In many cas­es the exten­sion for the 45-day iden­ti­fi­ca­tion peri­od as well as the 180-day require­ments to close is extend­ed unit May 1, 2025.  How­ev­er, when you read to long list of state and coun­ty affect­ed and the exten­sion it may be very con­fus­ing.

The relief auto­mat­i­cal­ly extends var­i­ous tax dead­lines to May 1, 2025, for tax­pay­ers that live or oper­ate a busi­ness in any of the fol­low­ing areas:

• All of Alaba­ma,
• All of Geor­gia,
• All of North Car­oli­na,
• All of South Car­oli­na,
• 41 coun­ties in Flori­da,
• 8 coun­ties in Ten­nessee, and
• 6 coun­ties in Vir­ginia.

Specif­i­cal­ly, the relief extends both the 45-day iden­ti­fi­ca­tion peri­od dead­line and 180-day exchange peri­od dead­line to May 1, 2025, if the orig­i­nal dead­lines fell on or after the “dis­as­ter date.” The dis­as­ter dates for each state are:

• Alaba­ma — Sep­tem­ber 22, 2024
• Flori­da — Sep­tem­ber 23, 2024
• Geor­gia — Sep­tem­ber 24, 2024
• Vir­ginia, North Car­oli­na, and South Car­oli­na — Sep­tem­ber 25, 2024
• Ten­nessee — Sep­tem­ber 26, 2024

We are pro­vid­ing the fol­low­ing link to the IRS web­site for addi­tion­al infor­ma­tion.

IRS pro­vides Hur­ri­cane Mil­ton relief; May 1 dead­line now applies to indi­vid­u­als and busi­ness­es in all of Flori­da; many busi­ness­es qual­i­fy for deposit penal­ty relief | Inter­nal Rev­enue Ser­vice

We have received calls from investors who now are seek­ing replace­ment prop­er­ties because the poten­tial iden­ti­fied prop­er­ties are now dam­aged, and the prop­er­ty will not be repaired for many rea­sons. Over the years the avail­abil­i­ty of DST has sat­is­fied many §1031 exchanges.  In addi­tion, many DST are prepacked with non-recourse debt to sat­is­fy the debt replace­ment that many investors may need to sat­is­fy the 1031 require­ments.

Investor Restric­tion:

DST’s (Delaware Statu­to­ry Trusts) are for accred­it­ed investors only.  Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and com­pli­ment your finan­cial objec­tives. For more infor­ma­tion on how to prop­er­ly set up an IRC 1031Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com.

This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus.  Invest­ing in secu­ri­ties, real estate, or any invest­ment, in any form, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all of your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor.   NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion). Our cor­po­rate office is locat­ed at 999 Van­der­bilt Beach Road, Suite 200, Naples Flori­da 34108. Secu­ri­ties Offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC. 8215 SW Tualatin ‑Sher­wood Rd, Suite 200 Tualatin, OR 97062. MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed. 

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