The Internal Revenue Service (IRS) recognizes that individuals who structure their real estate sales as a 1031 exchange are required to abide by stringent timeframes in which they must identify and acquire replacement real property.
NOTE: Please consult with a certified tax professional to provide the most up-to-date guidance relating to Internal Revenue Service issues and any 1031 exchange matters.
The agency is also cognizant of the fact that in the event of a federal declaration of disaster, impacted taxpayers will require additional time to finish their real estate dealings.
Accordingly, the IRS has provided relief detailed in Section 17 of Revenue Procedure 2018-58. In light of the ongoing coronavirus pandemic, the IRS released Notice 2020-23, providing, along with other support-minded provisions, an extension of the 1301 deadlines that will fall between April 1 and July 15. Regrettably, this vital relief has been impeded by an untimely deviation from standard terminology, prompting tax and legal service providers to quarry over the specific relief provisions afforded by the Notice.
In the past, when the IRS implemented a notice allowing for an extension of the 45-day identification window as well as the 180-day timeframe in which to acquire a replacement property, they utilized a standard format with all-encompassing language. The recent IRS Notice 2020-23, on the other hand, features very specific language with regards to its applicability:
“Any person performing a time-sensitive action listed in…Revenue Procedure 2018-58…which is due to be performed on or after April 1, 2020, and before July 15, is an Affected Taxpayer.”
Notice 2020-23 includes extensions of numerous tax windows as a result of the COVID-19 outbreak, however, the text of the Notice does not explicitly mention any of them—including those pertaining to the 1031 program—and instead only refers to the entire Rev. Proc. 2018-58. A faction of tax and legal experts believe Rev. Proc. 2018-58 is not a valid vehicle for extending the 1031 timeline due to the Notice’s failure to explicitly list Section 17 and like-kind exchanges. Further, other industry advisors point to Section III.C. of the Notice, which states:
“Affected Taxpayers also have until July 15, 2020, to perform all Specified Time-Sensitive Actions, that are due to be performed on or after April 1, 2020, and before July 15, 2020.”
The consensus is that these terms override the language contained within Rev. Proc. 2018-58 which affords 1031 taxpayers the later of 120-days or the final day of the disaster extension window as authorized per IRS guidance—despite the fact the July 15, 2020 deadline cited in the Notice is typically a significantly shorter window.
Subsequently, individuals who are required to either identify or acquire real estate between April 1 and July 15 are now forced to decide whether their timeframe to complete the process is the July 15, 2020 deadline according to Notice 2020-23, or if Rev. Proc. 2018-58 supersedes the Notice, meaning they would be provided with a 120-day extension to complete their transactions. As of now, the majority of 1031 experts predict that the more prohibitive regulations contained in Notice 2020-23 are controlling with regards to extensions for 1031 exchanges. Still, there is some disagreement within the industry, with some advisors believing that the more permissive 120-day extension provided by Rev. Proc. 2018-58 is applicable.
The following is a breakdown of each potential scenario—as well as third category of available relief consistent with both of the ordinances.
1031 Possible Extensions Per Notice 2020-23:
- If either (not both) the 45 or 180-day exchange deadline falls between the period of April 1 and July 15, the individual is afforded an extension to July 15.
- Exchanges initiated on or after June 1 will receive no extension on the 45-day identification window; exchanges initiated between February 16 and May 31 will have until July 15 to complete the identification process.
- Exchanges initiated on or after January 18 will receive no extension on the 180-day deadline for acquiring a replacement real estate asset; exchanges initiated between October 4, 2019 and January 17, 2020 would have until July 15 to purchase a replacement property.
- If an individual sold a property between January 17 and February 16, they will not be afforded an extension of either the 45-day identification period or the 180-day period for the replacement deadline.
1031 Possible Extensions Per Revenue Procedure 2018-58:
- If either the identification (45-day) or replacement (180-day) deadline is scheduled between April 1 and July 15, the individual is considered an “Affected Party” and will receive extensions offered per Rev. Proc. 2018-58.
- The 45-day ID window for exchanges initiated between February 16, 2020 and May 31, 2020 will get an additional 120 days to ID and acquire replacement property.
- The 180-day window for exchanges initiated between October 4, 2019 and January 17, 2020, will get a further 120-days to complete the replacement property transaction.
- Taxpayers who conduct a sale between January 17, 2020 and February 16, 2020, will not get an extension of either 45-day ID or 180-day periods.
1031 Possible Extensions Per Notice 2020-23 & Revenue Procedure 2018-58:
- Rev. Proc. 2018-58 allows the modification of replacement real estate IDs for individuals whose 45-day deadline has passed from the date of the disaster declaration in the event the asset was “substantially damaged by the disaster”
- The above terminology pertains to physical damage, such as that resulting from natural disasters or fire, and does not specific whether a pandemic and the associated quarantine, would be  considered damage.
- While the IRS NOTICE fails to offer further guidance on this issue, individuals could theoretically make the argument that the COVID-19 could be considered a qualifying damage
Until the IRS issues additional clarification on the issue, potentially affected individuals will have no other alternative but to decide which interpretation of the IRS’s existing guidelines they believe to be controlling and structure their 1031-related real estate transactions accordingly. As always, it is highly recommended to consult with a certified tax professional to determine the latest information when considering 1031 exchanges or any IRS programs.
