Articles

IRS Provides Limited Relief for Taxpayers in the Midst of 1031 Exchanges by Arkadiy (Eric) Green, CPA


Posted on April 27, 2020 by Eric Green

Investors and other taxpayers involved in Section 1031 tax-deferred exchanges during the COVID-19 pandemic may now have additional time to identify and/or close on replacement property without losing the preferential tax treatment afforded by these transactions.

Section 1031 of the Internal Revenue Code allows real estate investors to defer recognition of capital gains on the sale of certain commercial and residential real estate when they reinvest the proceeds into other like-kind investments of real property of equal or greater value. To qualify for this tax benefit, individuals must identify replacement property within 45 days of the initial property sale and complete the acquisitions of the replacement property within 180 days. However, given the various government restrictions responding to the coronavirus, including quarantine orders and business and building closures, many taxpayers who were in the middle of Section 1031 exchanges may have a very hard time meeting these strict deadlines at this time.

On April 9, 2020, the IRS issued Notice 2020-23, which postpones deadlines for numerous tax filing, payment and time-sensitive actions, including the closing of certain Section 1031 exchanges. More specifically, taxpayers whose 45-day deadline to identify 1031 replacement property and/or their 180-day deadline to complete an exchange (or comparable periods in reverse like-kind exchanges) fall between April 1 and July 15, will have these deadlines automatically extended to July 15, 2020.

With this extension, a taxpayer involved in a 1031 exchange who sold the relinquished property on February 16 and would otherwise be required to identify replacement property by April 1, will now have until July 15 to do so. In this situation, the taxpayer would still have until August 14, 2020, (180 days from February 16) to complete an acquisition of the replacement property. It is important to note that, as of April 26, 2020, the IRS has not offered these deadline extensions to apply to 1031 exchanges for which the 45-day or 180-day deadline fell before April 1, 2020 (e.g., 1031 exchanges originated before February 16 with 45-day period deadlines before April 1, 2020).

In addition to this relief for 1031 exchanges, the IRS also relaxed the timeline taxpayers have to reinvest capital gains into qualified opportunity zones (QOFs) until July 15, when the 180-day period would otherwise end after April 1 and before July 15 of this year.

These extensions of 1031 deadlines provide some welcome relief to taxpayers under the gun to complete exchanges in time to qualify for tax deferral and to select the right property that aligns with their unique investment needs and goals. However, this relief falls short on several fronts. For one, it does not recognize that many taxpayers who were in the middle of 1031 exchange transactions before the COVID-19 pandemic, with 45-day or 180-day period deadlines expiring as early as late January, were also negatively affected by the crisis and unable to meet their 1031 exchange deadlines. Further, many tax practitioners and real estate trade associations have been actively lobbying for more substantial relief that would provide an automatic 120-day extension for both 45-day and 180-day period deadlines (similar to the way in which the IRS historically extended 1031 exchange deadlines for taxpayers located in federally declared disaster areas). We hope that the IRS will provide this additional and much-needed relief soon.

 

About the Author: Arkadiy (Eric) Green, CPA, is a director of Tax Services with Berkowitz Pollack Brant Advisors and CPAs, where he works with real estate companies, commercial and residential developers, property management companies, real estate investors and high-net-worth individuals to structure investments and complex transactions for maximum tax efficiency. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.