We have received many calls over the past few weeks from clients and real estate investors who are concerned that with all of the disruption that the COVID–19 pandemic has caused in our economy, they won’t be able to meet the strict deadlines required in a 1031 exchange. Without federal intervention allowing for an extension, the financial impact on 1031 exchangers could be devastating, as they get saddled with the capital gains tax liabilities the rule was designed to help them avoid.
As a reminder, Internal Revenue Code section 1031 allows a taxpayer to defer capital gains tax liability on appreciated real property as long as timing guidelines are adhered to: 45 days to identify a replacement property upon the close of the relinquished property and another 135 days (total of 180) to close on the replacement property.
With the highly contagious aspect of the virus shuttering many of the businesses needed to execute 1031 exchange transactions (attorneys, qualified intermediaries, title companies) and with shelter-in-place restrictions now in force in many states, it is becoming exceedingly difficult to complete a 1031 exchange within the current defined timelines. That is one reason for what many (including the National Association of Realtors) are advocating to the Department of the Treasury; For an extension that would allow for investors to fairly and successfully complete their exchanges. This request is not without precedent.
In previous times of a Presidentially declared disaster, an exchanger may be allowed an extension of either the 45-day or 180-day deadlines (or both). Tax relief is often afforded to victims of these Federally declared disasters. For example, relief was extended to residents of defined counties impacted by Hurricanes Michael and Florence, the California wildfires and most recently, the Tennessee tornados. In the current crisis, President Donald Trump has already approved disaster declarations in several states due to the COVID-19 epidemic.
Keep in mind, even under a disaster declaration, IRS notices must include specific language allowing for extensions to 1031 exchangers and the notices generally apply only to residents of affected counties. In order to obtain an extension, the notice must specifically mention IRS Rev. Proc. 2007-56, section 17, which provides specific language about who the extension would apply to, for how long and what conditions must be met. For these reasons, it is important for exchangers to work closely with their advisors to explore if they are eligible for an extension.
At Fortitude Investment Group, we are closely watching policy changes that could impact our clients and potential investors. Don’t hesitate to contact us if you have any questions or if you simply want to stay abreast of the situation.