Deadlines to Complete Some Section 1031 Like-Kind Exchanges Are Extended Due to COVID-19
Kelley Drye Client Advisory
On April 9, 2020, the U.S. Treasury Department issued Notice 2020-23, which further expands the scope of the federal income tax extension that the Treasury Department had previously announced. Notice 2020-23 not only extends the time for filing certain federal tax forms and paying certain federal taxes, but also extends the time for making certain tax elections and completing certain time-sensitive actions. Among the time-sensitive actions that taxpayers now have more time to complete are certain actions required to complete deferred Section 1031 like-kind exchanges.
Under certain circumstances, taxpayers are permitted to exchange, without recognizing taxable gain, real property held for productive use in a trade or business or for investment for other real property of like kind which is to be held either for productive use in a trade or business or for investment. The transfer of “relinquished property” and the receipt of “replacement property” need not be simultaneous. A taxpayer may effectively acquire replacement property after selling relinquished property by following specified procedures, which include among other things identifying the replacement property within 45 days of transferring the relinquished property and closing the acquisition of the replacement property within 180 days (or the due date of the taxpayer’s tax return for the year of the initial transfer, if sooner) of transferring the relinquished property. Under some circumstances, taxpayers are also permitted to engage in “reverse” exchanges, pursuant to which taxpayers are able to lock in the acquisition of replacement property before disposing of relinquished property. “Safe harbor” reverse exchanges are subject to requirements and deadlines similar to the ones for more conventional “forward” exchanges. The COVID-19 pandemic has, of course, made it much more difficult for taxpayers to identify and acquire replacement properties in the case of forward exchanges or dispose of relinquished properties in the case of reverse exchanges.
Notice 2020-23 provides taxpayers with additional time to complete time-sensitive actions that are identified in Treasury Regulation §§ 301.7508A-1(c)(1)(iv) – (vi) or Revenue Procedure 2018-58, and which are due to be performed on or after April 1, 2020, and before July 15, 2020. Among the normal periods for the completion of time-sensitive actions identified in Revenue Procedure 2018-58 are:
- In the case of a forward exchange, the 45-day replacement property identification period and the 180-day period to complete the exchange; and
- In the case of a safe-harbor reverse exchange under Revenue Procedures 2000-37 and 2004-51, the 5-business day period to enter into a “qualified exchange accommodation agreement,” the 45-day relinquished property identification period, the 180-day period for re-transferring the property that was transferred to the “exchange accommodation titleholder,” and the 180-day combined time period that the relinquished property and the replacement property may be held in a “qualified exchange accommodation arrangement.”
Under Notice 2020-23, taxpayers that previously initiated Section 1031 like-kind exchanges have until July 15, 2020 to perform actions that are identified in Revenue Procedure 2018-58 and that are due to be performed on or after April 1, 2020, and before July 15, 2020. In the case of Section 1031 like-kind exchanges, relief has not been granted in the case of actions that were required to have been completed before April 1, 2020. Thus, some taxpayers now have additional time within which to identify replacement (or relinquished) property or complete exchanges, but taxpayers that missed deadlines before April 1, 2020 may still be out of luck.
Notice 2020-23 applies to dozens of time-sensitive actions, and not specifically like-kind exchanges, so there are a number of open questions under the notice. For example:
- It is not clear how the notice impacts deferred like-kind exchanges that are initiated on or after April 1, 2020 and before July 15, 2020.
- Section 17 of Revenue Procedure 2018-58 provides that under certain circumstances, even longer extensions may be available for certain like-kind exchange related deadlines. Notice 2020-23 does not refer to Section 17 of Revenue Procedure 2018-58, so it is unclear whether extensions beyond July 15, 2020 are available.
Taxpayers that have deferred like-kind exchanges in progress should immediately contact the other parties to their exchanges, to coordinate actions taken in response to Notice 2020-23.