The IRS Finally Clarifies its April Guidance Providing Extensions for 1031 Exchange Deadlines
On August 11, 2020, the IRS published an FAQ on its website finally clarifying that Notice 2020-23 (April 10, 2020) only extended the 45-day identification deadline and 180-day completion deadline for Section 1031 exchanges, for “affected taxpayers” until July 15, 2020. Historically, the IRS has issued disaster relief pursuant to Rev. Proc. 2018-58 for natural disasters, which are geographically limited and have a more finite disaster date/disaster period than the Covid-19 pandemic. Notice 2020-23 differed from many prior disaster relief notices in that it provided much broader relief to all taxpayers with time sensitive deadlines listed in Rev. Proc. 2018-58, that fell between April 1, 2020 and July 15, 2020.
Unfortunately, the much-needed extension for taxpayers conducting a 1031 exchange was marred by a departure from standard language, giving rise to different interpretations of how the relief was to be applied and if the traditional longer extension of 120 days, provided for in Rev. Proc. 2018-58 may apply. Notice 2020-23 appeared to treat dates in that timeframe as an ongoing disaster. The Federation of Exchange Accommodators (“FEA”- qualified intermediary trade group) and numerous real estate trade associations requested clarification from the Secretary of the Treasury and believed that further relief was necessary (after the FEA initially provided the industry guidance that the Notice deadline controlled, which didn’t discuss ambiguity/alternatives). In addition, there was at least one scholarly article that highlighted several issues and agreed that in the absence of clarity, a taxpayer would have a reasonable basis to interpret that the 120-day extension was applicable. Other articles in reputable publications like JD Supra and Law 360 also discussed this ambiguity.
On August 11, 2020, almost a month after the July 15th deadline passed, the IRS published a CV-19 FAQ. It is peculiar that the IRS would issue clarification at this time as taxpayers have already passed the initial potential deadline (July 15th) and had to decide on how to interpret the relief notice at that time. Furthermore, if the IRS intended on using very informal guidance like an FAQ to address and acknowledge the issue, this could have been done more expeditiously during the relevant time period, thus allowing taxpayers to make an informed decision regarding their exchange.
The existence of this FAQ acknowledges that clarification was needed. However, due to its untimely publication, it is reasonable to assume that taxpayers who relied on the broader interpretation of Rev. Proc. 2018-58, should not be penalized for relying on the more formal and controlling guidance. Exchangers and their advisors should carefully review any future IRS Notices regarding extensions and make determinations regarding extensions accordingly.
For additional information and background on the Notice 2020-23 issue, please read our articles: It’s a Struggle to Understand the IRS’ Guidance for 1031 Extensions and Ambiguous 1031 Exchange Extension puts QIs and Exchangers in an Awkward Position. When faced with ambiguous guidance or conflicting administrative rules, the conservative approach is often prudent; however, advisors often need to make their clients aware that other interpretations are possible as discussed by these articles and others mentioned above.
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