Like-Kind Exchange and Opportunity Zone Deadlines Extended
In light of the challenges associated with the COVID-19 pandemic, on April 9, 2020, the Internal Revenue Service (the “Service”) issued Notice 2020-23 (the “Notice”), which grants taxpayers that have filing deadlines between April 1 and July 14 a broad extension until July 15, 2020. The Notice provides relief to taxpayers with time-sensitive actions, including the extension of deadlines under both Section 1031 of the federal tax code (the “Code”) and Opportunity Zone investments.
Section 1031 Exchanges
Under Section 1031 of the Code, a qualifying investor may defer capital gains if it sells real property and, within a certain period, purchases different real property. The most common form of 1031 exchange requires an investor to identify a replacement property within 45 days after the sale of the first property, and to close on the replacement property within 180 days after the sale of the first property. If the investor follows the timeframes and requirements set forth in the Code, the Service views the investor as exchanging like-kind properties and the investor need not pay capital gains taxes that would otherwise be applicable to the proceeds of the sale of the initial property.
The Notice allows taxpayers engaged in Section 1031 exchanges (including reverse exchanges) until July 15, 2020 to meet both the 45-day identification period and the 180-day exchange period if either such period would otherwise have expired between April 1, 2020 and July 14, 2020.
Taxpayers should note that the Service has not granted retroactive relief if deadlines for either the 45-day identification period or the 180-day exchange period occurred prior to April 1, 2020. In addition, if a taxpayer benefits from an extension of the 45-day identification period, the Notice does not extend the 180-day period to close the transaction in a corresponding fashion. Stated another way, each of the 45-day identification period and the 180-day exchange period run independently of one another, and each is individually measured from the sale of the initial property. Only a deadline occurring during April 1, 2020 and July 14, 2020 will be extended.
The Service did not use its authority under Revenue Procedure 2018-58 to extend an individual taxpayer’s 45-day identification period or the 180-day exchange period for a pre-stated amount of time, such as the 120-day extension, which has been used in the past for areas facing natural disasters. As a result, taxpayers will have variable extensions depending on how close their deadlines are to July 15, 2020.
Opportunity Zone Investments
A taxpayer who qualifies for Opportunity Zone benefits under Section 1400Z-2 of the Code can defer recognition of certain capital gains and, in some cases, avoid taxable gains from an investment if the taxpayer holds its investment for least ten years and meets other requirements. Similar to Section 1031 exchanges, a taxpayer must satisfy certain deadlines (e.g., the applicable 180-day period to invest realized capital gains in a qualified Opportunity Fund). If that 180-day period would otherwise have expired between April 1 and July 14 of this year, the deadline for such investment will now be July 15, 2020.
There are numerous additional requirements and considerations for taxpayers contemplating participating in either Section 1031 exchanges or Opportunity Zone investments. Please contact Kristen Boike, Mary A. Hennessey, or one of the other attorneys in Honigman’s Real Estate Department or Tax Practice Group for advice on Section 1031 exchanges or Opportunity Zone investments, or other matters related to COVID-19 more generally.