The IRS published Notice 2020-23 on April 9, 2020, which provides, among other items, an extension of the 1031 Exchange and Opportunity Zone deadlines, as a result of the Covid-19 pandemic, and subsequent Presidentially declared disaster.
The current Notice provides in Section III.A. that “…any person performing a time-sensitive action listed in… Revenue Procedure 2018-58…, which is to be performed on or after April 1, 2020, and before July 15, 2020 (Specified Time-Sensitive Action) is an Affected Taxpayer”. This applies to taxpayers involved in a 1031 exchange. The Notice then goes on to declare the postponement of the due date for Affected Taxpayers to July 15, 2020.
Revenue Procedure 2018-58 Section 17 specifies 1031 exchange transactions among those time sensitive transactions and, as an Affected Taxpayer under the current notice, it provides for an extension of the 1031 exchange deadlines. However, the current Notice does include a bit of ambiguity, or at least uncertainty, as to whether the July 15, 2020 date supersedes the extensions set forth in Rev. Proc. 2018-58, which provides in Section 17.01 that “Taxpayers are provided the relief described in this section if an IRS News Release or other guidance provides relief for acts listed in this revenue procedure (unless the news release or other guidance specifies otherwise).” I think it is reasonable to infer that the July 15, 2020 outside date is the date which qualifies when the Specified Time-Sensitive Action must be performed in order to benefit from the 120-day extension provided in Rev. Proc. 2018-58, and not the date by which that action must be performed.
Furthermore, the current Notice does not consider relief for a taxpayer that completed and failed an exchange due to complications created by the Covid-19 pandemic where 1031 escrow funds were returned to the taxpayer before April 9, 2020 (the date of the Notice). Can they reopen their transaction to avail themselves of the confirmed extension? It remains to be seen if the IRS will provide further guidance.
An additional question raised by this Notice is its failure to address whether a taxpayer who is past their 45-day identification period can “re-open” their exchange and identify new properties.
Typically, this is only allowed when an identified replacement property is “substantially damaged by the federally declared disaster” pursuant to Revenue Procedure 2018-58 Section 17.03. Could an argument be made that the quarantine mandates caused by the Covid-19 pandemic have “substantially damaged” replacement properties, which would allow for the reopening of identifications? The wording of the Revenue Procedure shows that it was written to address physical damage caused by natural disasters such as hurricanes, tornados and wildfires, and did not contemplate how a global pandemic might create economic damage – temporarily closing businesses, but not doing any physical property damage.
Lastly, the Notice also provides that “[f]or purposes of this notice, the term Specified Time-Sensitive Action also includes an investment at the election of a taxpayer due to be made during the 180-day period described in Section 1400Z-2(a)(1)(A) of the Code” related to Opportunity Zones. Taxpayers who have sold property and wish to reinvest the proceeds in an Opportunity Zone property, which would be considered a Specified Time-Sensitive Action, and who fall within the April 1, 2020 and July 15, 2020 dates, would qualify for an extension.
Summary for taxpayers in a 1031 exchange transaction:
• Taxpayers must have a Specified Time-Sensitive Action, such as identifying their replacement properties, or purchasing their replacement property, that falls within the April 1, 2020 to July 15, 2020 date specified in the Notice to be deemed an Affected Party. As an Affected Party, Rev Proc 2018-58 provides for an extension of the later of the IRS Notice or 120-days, whichever is greater. The current notice does not specify an override of 2018-58. We are hoping the Service will clarify that the timelines in 2018-58 apply.
• Taxpayers who sold relinquished property between February 16, 2020 and May 31, 2020 would be eligible to receive extra time to identify and acquire their replacement property. Whether they receive an additional 120 days, or if the additional days are curtailed by the July 15, 2020 end date, is open to interpretation.
• Taxpayers who sold relinquished property on or after October 4, 2019, but prior to February 16, 2020 should receive an additional 120-days in which to complete their exchange, once again, assuming Rev Proc 2018-58 is applied for determining the extension date.
• There is currently no guidance on reopening replacement property identifications for those taxpayers who are already past their 45-day time period. However, Rev Proc 2018-58 reopens the identification if the property was “substantially damaged by the disaster.” This language contemplates physical damage and does not seem to contemplate whether a pandemic, and a subsequent quarantine order, could be considered damage. Although the IRS Notice does not expand upon this concept, taxpayers could potentially make this argument.
If you have any questions about a 1031 exchange please contact Todd R. Pajonas, Esq., President at todd@legal1031.com or or Matthew K. Scheriff, CPA, Executive Vice President at matt@legal1031.com
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