Many taxpayers affected by COVID-19 may have complications or delays from the impact to the real estate industry, including their ability to meet required timelines and properly defer tax relating to these transactions.
Section 1031 governs tax deferred exchanges for those that are of like kind. Only real property is eligible for the deferral provisions of section 1031 and personal property no longer qualifies. Section 1031 allows qualifying real property to be “exchanged” and tax deferred under the guidelines and restrictions of the code. Taxpayers have 45 days after the sale of relinquished property to identify replacement property, and 180 days from the sale of relinquished property to purchase qualifying replacement property.
Opportunity Zone Fund Investments have a similar, 180-day period requirement from the date of sale to invest qualifying gains in an opportunity fund in order to defer, or possibly eliminate certain gains. This 180-day period can be measured at the entity level or passed through to investors. The 180 days begins on the date the gain is realized by the entity. Gains realized in a pass-through entity to investors have either 180 days from the last day of the entity’s tax year, or 180 days from the due date (not including extensions) of the entity’s tax return for year of gain. This offers greater flexibility for gains within a pass-through entity.
The IRS issued Notice 2020-23 that extended many filing deadlines for taxpayers due COVID-19. The notice provides that any person performing a time sensitive act due on or after April 1, 2020 and before July 15, 2020, is considered an affected taxpayer. This is known as Specified Time-Sensitive Action.
Notice 2020-23 also provides an extension of time for opportunity zone fund investments. While this extension is only applicable for deadlines expiring between April 1st and July 15th, it does offer investors with time periods soon to expire some relief by providing additional time to secure their investments.
Additionally, the IRS has provided some relief for real estate investors in the form of an extension with the 45-day identification and 180-day exchange period deadlines for both deferred and safe-harbor reverse Section 1031 exchanges and Opportunity Zone Fund Investments. However, if a taxpayer’s 45th day deadline for identification is already July 15th, it is likely the original date of closing remains in effect, as the date is outside of the dates provided in relief.
If a qualified opportunity zone is located in a federally declared disaster area with businesses temporarily closed due to shelter-in-place orders, or there is significant economic distress due to the pandemic, they may have additional time (up to additional 24 months) in addition to the 31 month working capital safe harbor to utilize working capital.
The President has approved both Missouri and Illinois as major disaster areas, among other states. If the terminology is changed to “emergency”, both states would qualify. It seems to reason that perhaps they might be availed this additional relief.
The extension allowed by this notice does not refer to Section 17 of Revenue Procedure 2018-58. The Revenue Procedure would provide either a 120-day extension or an extension until the date specified in the Notice (whichever is later), for time-sensitive acts postponed for taxpayers affected by a federally declared disaster. While Notice 2018-58 permits the revision of replacement property identification for those past their 45-day period where property is “substantially damaged by the disaster”, it does not specifically address a “pandemic” and is not mentioned in the current guidance.
The notice stipulates that affected taxpayers have until July 15th, 2020, to perform all Specified Time-Sensitive Actions. Note this is not historically how the IRS has handled these types of situations. There is confusion, and most commentators believe the more restrictive provisions of Notice 2020-23 will control how taxpayers should proceed. This guidance will impact investors where the pace of closings has slowed, which could leave investors unable to defer gains. The relief is automatic, so no additional forms or requests are required to take advantage of the revised deadline.