IRS COVID-19 Deadline Extensions Do Not Include Section 1031 Exchanges… Yet
April 3, 2020 by
UPDATE – On Thursday, April 9th, 2020 the IRS issued Notice 2020-23 extending additional deadlines. These extensions include the deadlines to file Tax Court Petitions and to meet deadlines under Section 1031. Please see the article summarizing the additional deadline extensions here.
The IRS has extended several tax filing deadlines to give taxpayers more time to focus on COVID-19 issues. In its first wave of deadline extensions, the IRS moved the ever-popular April 15, 2020 deadline for all 2019 income tax filing and payment deadlines to July 15, 2020, for all taxpayers who file their federal income taxes on April 15, 2020. See IRS Notice 2020-18. The relief applies to all individual returns, trusts, corporations, and estimated tax payments for 2020 also due on April 15, 2020. Some taxpayers, however, like fiscal tax return filers, were specifically left out of the current extensions. But as shelter-in-place provisions drag on, more tax deadlines are implicated—especially for taxpayers currently facing deadlines related to Section 1031 like-kind exchanges.
Extensions for Federal Declared Disasters
When the President of the United States issued an emergency declaration on March 13, 2020, it allowed the Secretary of the Treasury to provide relief from tax deadlines to taxpayers adversely affected by COVID-19 under Section 7508A(a) of the Internal Revenue Code. Section 7508A provides authority to postpone the time for performing certain acts under the internal revenue laws when the Treasury Secretary determines they are affected by a Federally declared disaster. The IRS recently issued IRS Notice 2020-20, expanding the original IRS Notice 2020-18, to include deadlines to file and pay Gift and Generation Skipping Transfer Taxes (Form 709). Although the Treasury Secretary has authority to do so, it has yet to extend the deadlines for taxpayers in the midst of Section 1031 exchanges. As the United States appears to be settling into another month of social distancing and local shelter-in-place restrictions, many taxpayers may need relief from these additional deadlines.
Section 1031 Like-Kind Exchanges
If a taxpayer swaps an asset for another asset, it is usually a taxable sale. However, if the exchange comes within Section 1031, then it can generate no tax or limited tax due. Essentially, a taxpayer can change their investment without, according to the IRS, cashing out or recognizing capital gain. The investment continues to grow tax-deferred and is a significant benefit to taxpayers. The recent tax code changes limited these exchanges to real estate, but many taxpayers still use it and realize significant tax benefits; especially since there is no limit on how many times a taxpayer can perform a Section 1031 exchange. But note, some hard and fast rules apply that, if not followed, doom a Section 1031 exchange; and many of those rules involve deadlines that the Treasury Secretary has yet to extend.
- Qualified Intermediary and Escrow Account. In most cases, a taxpayer must find a qualified intermediary to handle the exchange. Unless you can find the exact property you want—owned by someone who also wants to take yours in exchange—you’ll need a third party to hold the cash after you sell, before the purchase of the replacement property. Though many choices exist for qualified intermediaries, choose wisely. Failure to meet the specific requirements and properly establish a qualified escrow account can deny the tax benefits. If a taxpayer has receipt, or even constructive receipt, of the money involved in the exchange, the Section 1031 exchange is ruined.
- 45-Day Deadline. A taxpayer has 45 days following the sale of the property to designate a replacement property, in writing, to the intermediary.
- 180-Day Deadline. A taxpayer must then close on the new property within 180 days of the sale of the old property. The 45 day and 180 day deadlines run concurrently: essentially, 45 days to designate and another 135 days to close. The deadline is based on calendar days so a taxpayer must know exactly when the deadline expires.
Potential Extensions of Section 1031 Deadlines
In Revenue Procedure 2018-58, the IRS included Section 1031 exchanges in the expanded the list of time-sensitive acts that could be postponed under Sections 7508 and 7508A. Section 17 of Revenue Procedure 2018-58 outlines the specific relief, which generally extends the 45-day and 180-day deadlines by 120 days—but not past the due date of the return for the year of the transfer. But these deadline extensions are not automatic. Until an IRS News Release, or other guidance, specifically stating that the deadlines under this Revenue Procedure are covered, the deadlines are not extended.
For example, Texas victims of severe storms and flooding were granted extensions for Section 1031 deadlines in a July 2019 News Release (TX-2019-02). The IRS granted similar extensions to Texas victims of tropical storm Imelda in an October 2019 IRS News Release. Both News Releases explicitly refer to the list of time-sensitive acts described in Rev. Proc. 2018-58, and even point to Section 17 specifically, in reference to the relief for like-kind exchanges. To date, the IRS has issued no such guidance for COVID-19.
While many taxpayers may be waiting to start a Section 1031 exchange until after the full extent of COVID-19 is known, others may have already started the process. For those currently in the process of a Section 1031 exchange, they now face deadlines to find and designate replacement property or close on their transactions. With increasingly limited mobility and open offices, this could become problematic. Hopefully, relief from these tax deadlines will be given soon. During an ABA Tax Section Webinar on April 2, 2020, IRS Chief Counsel, Michael Desmond, indicated that the IRS is considering Revenue Procedure 2018-58 and certain deadlines that may need extending. Brown Fox will continue to monitor developments in our practice areas and update clients accordingly. If you have any questions, please reach out to a Brown Fox attorney about your specific situation.