Many of the pre-closing due diligence steps in the typical commercial real estate transaction such as title searches, surveys, inspections, local zoning issues, and environmental testing have been seriously disrupted and delayed by the COVID-19 pandemic. Because of these practical delays and others, meeting the deadlines for deferred and safe harbor reverse 1031 like-kind exchanges, along with contractual due diligence and closing deadlines, are a challenge in the current environment.
On April 9, 2020, the IRS released IRS Notice 2020-23 that provided extensions to deadlines for various federal tax payments, filings, and specified actions, including the deadlines related to Section 1031 like-kind exchanges. We discuss these extensions generally here.
IRS Notice 2020-23 postponed the deadlines for the 45-day identification period and the 180-day exchange period in deferred and safe harbor reverse 1031 like-kind exchanges. If the taxpayer’s 45-day identification period or 180-day exchange period in a deferred exchange or the analogous periods in the reverse exchanges under Revenue Procedure 2000-37 end between April 1, 2020 and July 15, 2020, then the applicable period is automatically postponed to July 15, 2020. The postponements are granted automatically and no further action is necessary by the taxpayer. A taxpayer can choose to opt out of the postponements. IRS Notice 2020-23 does not apply retroactively to 45-day identification periods and 180-day exchange periods that expired before April 1, 2020.
The postponement assumes that the due date for the taxpayer’s federal income tax return, including extensions, for the year of the transfer is not before July 15, 2020. No postponement period may extend beyond either the due date, including extensions, of the taxpayer’s federal income tax return for the year of the transfer.
The postponement of the 1031 like-kind exchange deadlines may extend further than July 15, 2020, but there is uncertainty on this viewpoint because of the lack of IRS guidance. The IRS effected the postponement of the 1031 like-kind exchange deadlines in IRS Notice 2020-23 by reference to the time-sensitive actions listed in Revenue Procedure 2018-58. Revenue Procedure 2018-58 is used for federally declared disasters and contains a list of specified federal tax actions that can be postponed, which includes the 1031 like-kind exchange deadlines above. It also includes Section 17, which provides for additional postponement rules solely for 1031 like-kind exchange deadlines, and specifically states that “Taxpayers are provided the relief described in this section [Section 17] if an IRS News Release or other guidance provides relief for acts listed in this revenue procedure [Revenue Procedure 2018-58] (unless the news release or other guidance specifies otherwise).” Because IRS Notice 2020-23 references solely the time-sensitive actions of Revenue Procedure 2018-58 and does not address Section 17, there is uncertainty about whether Section 17 of Revenue Procedure 2018-58 applies.
Under Section 17 (if applicable), if the relinquished property is transferred (or in the case of a safe harbor reverse 1031 like-kind exchange, the qualified indicia of ownership were transferred to the exchange accommodation titleholder (EAT)) on or before the date of the federally declared disaster, the 1031 like-kind exchange deadlines are postponed to the later of 120 days or the last day of the general disaster extension period authorized by an IRS News Release or other guidance announcing tax relief for victims of the specific federally declared disaster. Section 17 additionally applies its postponement benefits to the 45-day identification deadline in a 1031 like-kind exchange transaction in which the 45-day identification period deadline falls before the date of the federally declared disaster if the identified property is substantially damaged by said federal declared disaster and the transaction otherwise qualifies for postponement pursuant to Section 17. In no event may a postponement period under Section 17 extend beyond: (a) the due date (including extensions) of the taxpayer’s tax return for the year of the transfer or (b) one year. Because of the lack of IRS guidance, there currently is uncertainty as to whether Section 17 applies, when the disaster period started, when the disaster period ends, and the date of the disaster for when the 120-day period begins to run. On a webinar hosted by the American Bar Association Section of Taxation on April 14, 2020, IRS counsel confirmed that the IRS is presently compiling additional guidance that will clarify the 1031 like-kind exchange postponement rules. As of the date of this blog, no IRS guidance on the topic has been issued.
Taxpayers hoping to make use of the 1031 like-kind exchange benefits and the IRS’s postponements should consider including language in their agreements to account for postponed deadlines. Additionally, the parties should consider addressing any of the potential practical delays caused by the COVID-19 pandemic in their agreements at the beginning of negotiations to establish realistic timelines regarding the due diligence period and closing deadlines.
Members of Sands Anderson’s Commercial Real Estate Team stand ready to help with any of your real estate needs in these disrupted times. Members of Sands Anderson’s Tax Team are also available to provide assistance and advice in navigating the everchanging tax rules.
Disclaimer: The information contained herein is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax, legal, and financial adviser. This summary is not the provision of accounting, business, financial, investment, legal, tax, or other professional advice or services. Sands Anderson PC shall not be responsible for any loss incurred by any person who relies on this summary.