On Thursday, April 9, the Internal Revenue Service (IRS) issued Notice 2020-23 (the IRS Notice), which extends several deadlines, specifically including deadlines regarding Section 1031 “like-kind” exchanges.
Broadly stated, under a Section 1031 exchange (also called a like-kind exchange), no taxable gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment. A Section 1031 exchange can be structured as either a “simultaneous” exchange or a “deferred” exchange. A simultaneous exchange occurs when there are only two parties to a transaction and such parties engage in a true “exchange” of properties. The more common type of Section 1031 exchange, however, is the deferred exchange. In a deferred exchange, the taxpayer sells relinquished property to one party and then, at some later date, acquires one or more replacement properties from a different party. These deferred exchanges are conducted pursuant to various rules contained in Section 1031 of the Internal Revenue Code and the Treasury Regulations promulgated thereunder, and they typically include the use of a qualified intermediary to hold the cash from the sale of the relinquished property until it can be reinvested in replacement property within a certain time frame. The Tax Cuts and Jobs Act, which was enacted in December 2017, limited Section 1031 exchanges to real property.
In a deferred Section 1031 like-kind exchange, an investor who sells a real estate asset held for productive use in a trade or business or for investment can avoid paying any taxes on gain from such sale if the investor, within 45 days of the date of the sale, identifies one or more replacement properties to be acquired in the exchange and, within 180 days of such sale, consummates the acquisition of the identified replacement property (or properties).
Pursuant to the IRS Notice, both the 45-day deadline for investors to identify the replacement property and the 180-day deadline for consummating the acquisition of the replacement property are extended until July 15, 2020 if either of those dates falls on or after April 1, 2020 and before July 15, 2020.
As an illustration, if the sale of the property took place on January 3, 2020, then prior to the issuance of the IRS Notice, the date for identification of the replacement property (the 45th day after the date of the sale) would have been February 17, 2020 and the date for closing the acquisition of the replacement property (the 180th day after the date of the sale) would have been July 1, 2020; however, as a result of the issuance of the IRS Notice, the date for identifying the replacement property remains February 17, 2020 (because the original date for identifying the replacement property is prior to the April 1, 2020 to July 15, 2020 covered period), and the closing on the replacement property is extended until July 15, 2020 (because the original date for closing on the replacement property is within the April 1, 2020 to July 15, 2020 covered period).
As another illustration, if the sale of the property took place on April 1, 2020, then prior to the issuance of the IRS Notice, the date for identification of the replacement property (the 45th day after the date of the sale) would have been May 16, 2020 and the date for closing the acquisition of the replacement property (the 180th day after the date of the sale) would have been September 28, 2020; however, as a result of the issuance of the IRS Notice, the date for identifying the replacement property is extended until July 15, 2020 (because the original date for identifying the replacement property fell between the April 1, 2020 and July 15, 2020 covered period), but the closing on the replacement property remains September 28, 2020 (because the original date for closing on the replacement property fell outside the April 1, 2020 to July 15, 2020 covered period).
In addition to the simultaneous and deferred Section 1031 exchanges described above, taxpayers also can enter into what are referred to as safe harbor “reverse” Section 1031 exchanges pursuant to Revenue Procedure 2000-37. In these reverse exchanges, a taxpayer can utilize an exchange accommodation titleholder (EAT) to “park” either (i) property acquired from a third party that is intended to qualify as replacement property or (ii) property acquired from the taxpayer that is intended to qualify as relinquished property. Pursuant to Rev. Proc. 2000-37, if the taxpayer parks replacement property with the EAT, it must identify relinquished property within 45 days. Furthermore, the EAT has 180 days from the date it acquires any property to either (i) transfer it to the taxpayer as replacement property or (ii) transfer it to a third party as relinquished property. These 45-day and 180-day deadlines are similarly extended until July 15, 2020 if they originally fell on or after April 1, 2020 and before July 15, 2020.
Last, separate from this recent IRS Notice, there is a Revenue Procedure from 2018 (Rev. Proc. 2018-58) that provided for extensions of Section 1031 deadlines in the event of a federally declared disaster. It is unclear at this time whether this additional relief also may be available. We will continue to monitor and provide updates on any further guidance from the IRS concerning like-kind exchanges.
