Section 1031 exchange deadlines delayed due to COVID-19 outbreak

In their latest Emergency Declaration aimed at helping American taxpayers, the Department of Treasury and the Internal Revenue Service provided a deadline extension for taxpayers currently in the process of completing Section 1031 like-kind exchanges. IRS Notice 2020-23, released on April 9, 2020, provides for extensions to both the 45-day identification period and the 180-day replacement period if either period is set to end between April 1 and July 15, 2020. If either period deadline falls between April 1 and July 14, the new deadline is now July 15, 2020. This applies to both forward exchanges and safe harbor reverse exchanges under Revenue Procedure 2000-37.

While the Notice doesn’t refer to Section 1031 directly, it does appear that a taxpayer currently in the exchange process would be considered an “affected taxpayer.” An “affected taxpayer” is defined in the Notice as any person performing a time-sensitive action listed in the following to be performed on or after April 1, 2020, and before July 15, 2020:

• Section 301.7508A-1(c)(1)(iv)–(vi) of the Procedure and Administration Regulations
• Revenue Procedure 2018-58, 2018-50 IRB 990

It’s worth noting that in situations where the 45-day extension period is set to end between April 1 and July 15, but the 180-day replacement period falls beyond July 15, only the 45-day identification period is extended. The replacement period would still end 180 days after the transfer of the relinquished property under Notice 2020-23.

While Notice 2020-23 extends these deadlines for taxpayers in the exchange process, questions still remain unanswered because the Notice doesn’t address Section 1031 directly:

• Does this deadline extension only apply to taxpayers whose exchange proceeds are still being held by a qualified intermediary (QI)? There are taxpayers who had their 45-day or 180-day period expire between April 1 – 9, resulting in QIs returning exchange proceeds back to the taxpayer. The Notice doesn’t address whether such taxpayers, who received their exchange proceeds, are eligible for an extension or if their exchange is no longer valid.
• How long is the deadline extension? While the Notice extends the deadline for time-sensitive actions, there appears to be some contradicting information in the guidance cited in the Notice. For example, Revenue Procedure 2018-58, Section 17, addressing Section 1031 like-kind exchanges, provides an extension of time until the latter of the date specified in the Notice for federally declared disasters or 120 days. It’s unclear whether this 120-day provision applies to the time extensions granted by Notice 2020-23.
• Will any further guidance be released by the IRS to provide clarity around Section 1031 exchange time-sensitive requirements? Since Notice 2020-23 doesn’t directly address like-kind exchanges, how provisions of the Notice affect taxpayers in the process of an exchange is open to some interpretation. There’s also hope that the IRS will further extend deadlines for Section 1031 exchanges, as completing a real estate transaction may prove more difficult in the current economic climate.

While there are certainly unanswered questions as they relate to Section 1031 exchanges, there’s time to digest the potential impacts of the Notice 2020-23 extensions of time-sensitive deadlines and for the IRS to issue more guidance before any extended deadlines pass. If you’re currently involved in a Section 1031 and have questions about how Notice 2020-23 or any other IRS guidance may affect your ability to complete your exchange, please reach out to our team of experts.