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The cloudy state of Sec. 1031 exchanges during COVID-19

Apr 07, 2020

Update April 10, 2020: The IRS has issued Notice 2020-23 which includes relief with respect to specified time-sensitive actions including the section 1031 deadlines for taxpayers whose deadlines expire on or after April 1, 2020 and before July 15, 2020. More information to be included at a later date.

Several weeks ago, many of our lives started to change dramatically as COVID-19 breached our lives and routines. Prior to this, people were moving forward with the strong economy and participating in Sec. 1031 exchanges.

Now, those people are left confused regarding what they are supposed to do in the midst all the chaos and wondering if the declaration of disaster areas or any of the recent COVID-19 legislation has provided relief for the stringent 45-day identification period and 180-day replacement period that apply to Sec. 1031 exchanges.

Under Rev. Proc. 2018-58, the IRS laid out the requirements that would allow participants in a Sec. 1031 exchange to have an extension of these two key deadlines. However, in order for Revenue Procedure 2018-58 to come into effect for a specific disaster, the IRS must issue a notice or other guidance specifically authorizing Rev. Proc 2018-58 to go into effect and identifying those taxpayers eligible for its benefits. 

Unfortunately, despite all the recent legislation that has come out, the IRS has not yet issued such a notice or guidance. As a result, on March 23 of this year, a coalition of trade associations representing the real estate industry and real estate investors, operators, owners and lenders sent a joint letter to Treasury Secretary Steven Mnuchin and other key policy makers, requesting that the IRS quickly issue such guidance.

We remain hopeful that something will be released soon as lock-downs continue to stretch, making real estate transactions much more difficult to execute.

If and when the Rev. Proc. does go into effect, it will allow for the 45 or 180 day deadlines that occur on or after the date of the federal disaster to be extended until the later of: (a) 120 days or (b) the last day of the general disaster extension period authorized by an IRS News Release/guidance announcing tax relief for victims of the specific federally declared disaster. However, in no event may a deadline be postponed beyond either (a) the due date (including extensions) of the taxpayer’s tax return for the year of the transfer or (b) one year.

In order to qualify for the postponement provisions of Rev. Proc. 2018-58, the taxpayer must meet all of the following requirements:

  • The relinquished property was transferred on or before the date of the federally declared disaster, or, in the case of a reverse exchange, the Exchange Accommodation Titleholder (EAT) must have taken title to either the relinquished or replacement property on or before the date of the federally declared disaster
  • They must be an "affected taxpayer" as defined in the IRS guidelines
  • The taxpayer has difficulty meeting the 45-day identification period or 180-day period due to the federally declared disaster for any one the following or similar reasons:
    • The relinquished property or the replacement property is located in a covered disaster area
    • The principal place of business of any party to the transaction is located in the covered disaster area. Parties to a transaction include the qualified intermediary, the EAT, the settlement attorney, the lender, etc.
    • Any party to the transaction is killed, injured, or missing as a result of the federally declared disaster
    • A document prepared in connection with the exchange or a relevant land record is destroyed, damaged, or lost as a result of the federally declared disaster
    • A lender decides not to fund either permanently or temporarily a real estate closing due to the federally declared disaster or refuses to fund a loan to the taxpayer because flood, disaster, or other hazard insurance is not available due to the federally declared disaster
    • A title insurance company is not able to provide the required title insurance policy necessary to settle or close a real estate transaction due to the federally declared disaster

For those taxpayers currently in the middle of a Sec. 1031 exchange, it is important that you extend your tax return for the year of the property transfer so that if, and when, the IRS issues guidance allowing Rev. Proc 2018-58 to apply, your transaction will more likely qualify for the relief. Wipfli will continue to proactively monitor activity in this area and provide relevant information to our clients.

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Dannielle Lewis, CPA
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Crystal Christenson, CPA, MST
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