The initial impact COVID-19 and the national lockdowns had on 1031 exchange investors was to delay their ability to find replacement property. Showings were cancelled along with many title companies not allowing in person closings to happen.
Before the pandemic, one of the biggest pitfalls that has blown many exchanges is not being able to meet the 45/180 day deadline to identify and buy replacement property. If it was hard before, it was almost impossible during a lockdown.
The IRS was surprisingly quick to address this and on April 9, 2020, they issued notice 2020-23 which provided extensions until July 15th for various tax filing deadlines including 1031 exchanges that were initiated between April 15th and July 15th, 2020.
This meant that a person who closed on or after April 15th had until July 15th to identify replacement property, as instead of only having 45 days. Their 180 day deadline to close on that property, however, was not extended.
Moving forward, there is a little confusion as to whether exchangers who closed on the sale of their relinquished property after July 15th will still get to enjoy an extension of their 45 day ID window.
The reason is that there is another IRS guideline that allows for extending the deadlines in some situations. IRS Revenue Procedure 2018-58 provides an automatic 120-day extension of 1031 Exchange deadlines in the event that any future IRS news release or other guidance provides “general relief”.
“General relief” is what happened on April 9th under notice 2020-23. Some commentators believe that since notice 2020-23 specified an extension to the specific date of July 15th, that is the only extension available.
Others are taking the position that 1031 deadlines should be extended an additional 120 days for exchangers closing until the end of 2020.
If you recently closed on your relinquished property, the safest bet is to stick to the standard 45/180 day deadline.
If you do choose to take the interpretation that you can extend, talk to your qualified intermediary beforehand and make sure they will allow you to do so, and understand that there is a risk that your 1031 exchange might be disallowed by the IRS and you might have to pay your taxes.
Given the extended impact of the pandemic, it is possible that further guidance will be issued by the IRS to clarify if more extensions will be allowed. Check back soon to get up to the latest updates!
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