On April 9, 2020, the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) issued Notice 2020-23.
Notice 2020-23 addresses the threat posed by the COVID-19 crisis to real estate investors’ ability to complete ongoing like-kind exchanges under Section 1031 of the Internal Revenue Code (the Code) by extending the deadlines applicable to a taxpayer’s identification and purchase of replacement property (in a “forward” or traditional exchange), or identification and sale of relinquished property (in a “reverse” exchange), until July 15, 2020.
On March 13, 2020, the President issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act in response to the ongoing COVID-19 pandemic. The emergency declaration instructed the Secretary of the Treasury (the Secretary) “to provide relief from tax deadlines to Americans who have been adversely affected by the COVID-19 emergency, as appropriate, pursuant to 26 U.S.C. 7508A(a).”
Section 7508A of the Code provides the Secretary or his delegate with authority to postpone the time for performing certain acts under the internal revenue laws for a taxpayer determined by the Secretary to be affected by a federally-declared disaster.
On March 23, 2020, a real estate coalition including twenty-one associations, representing a broad cross-section of real estate industry participants, such as qualified intermediaries, property owners and operators, investors, lenders, title insurers and closers, realtors and others concerning all asset classes, sent a joint letter to the Secretary requesting that the Treasury Department and IRS take administrative action to help ensure liquidity in real estate markets by delaying deadlines applicable to like-kind exchanges that are currently underway (e.g., a taxpayer who has entered into an exchange agreement with a qualified intermediary or an exchange accommodation titleholding agreement with an exchange accommodation titleholder).
On April 9, 2020, the Treasury Department and the IRS issued Notice 2020-23. This notice amplifies the relief provided in Notice 2020-18 (issued March 20, 2020) and Notice 2020-20 (issued March 27, 2020) by providing additional relief under Section 7508A(a) of the Code to certain persons that the Secretary has determined to be affected by the COVID-19 emergency. This includes any person performing a time-sensitive action listed in Rev. Proc. 2018-58 which is due to be performed on or after April 1, 2020, and before July 15, 2020.
2. Application of Notice 2020-23
Rev. Proc. 2018-58, among other things, provides a list of time-sensitive acts, the performance of which may be postponed under section 7508A of the Code for taxpayers affected by a federally declared disaster. This includes a 45-day identification period or 180-day exchange period, as set forth in Section 1031(a)(3) of the Code and Rev. Proc. 2000-37, the last day of which falls on or after the date of a federally declared disaster.
Pursuant to Notice 2020-23, any person performing such a time-sensitive action which is due to be performed on or after April 1, 2020, and before July 15, 2020, has until July 15, 2020 to do so.
Under these guidelines, for taxpayers that intend to complete a Section 1031 like-kind exchange:
This relief is automatic and requires no further action by the taxpayer.
Notice 2020-23 does not apply retroactively to 45-day identification and 180-day exchange periods expiring prior to April 1, 2020.
3. Open Issues under Section 17 of Rev. Proc. 2018-58
Section 17 of Rev. Proc. 2018-58, by its terms, authorizes the extension of specified 45-day identification and 180-day exchange periods pursuant to a notice or other IRS guidance. However, there is a discrepancy between the extension periods contemplated by Notice 2020-23, which expire July 15, 2020, and those authorized by Section 17, which would potentially expire on a later date (as described below).
Section 17 provides that taxpayers participating in a Section 1031 like-kind exchange are entitled to specified relief “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).”
That relief includes the postponement of the last day of a 45-day identification period or 180-day exchange period, the last day of which falls on or after the date of a federally declared disaster, “by 120 days or to the last day of the general disaster extension period authorized by an IRS News Release or other guidance announcing tax relief for victims of the specific federally declared disaster, whichever is later”. (However, no postponement period may extend beyond either the due date, including extensions, of the taxpayer’s tax return for the year of the transfer or one year.)
Notice 2020-23 does not expressly address the application of Section 17, and it is arguable whether Notice 2020-23 “specifies otherwise” within the meaning of Section 17 by specifying a July 15, 2020 extension date (instead of a potentially later extension date authorized by Section 17). Consequently, it is currently unclear whether the 120-day (or later) extension under Section 17, if longer than the July 15, 2020 extension under Notice 2020-23, would apply.
However, the potentially longer relief afforded pursuant to Section 17 only applies, by its terms, to taxpayers who transfer relinquished property (in the case of a “forward” exchange), or whose exchange accommodation titleholder acquires title to replacement property (in the case of a reverse exchange), on or before the date of a federally declared disaster (which, in this case, would have been March 13). The potentially shorter relief afforded by Notice 2020-23 does not appear to impose such a requirement.
In an April 14, 2020 webinar hosted by the American Bar Association Section of Taxation, IRS counsel confirmed that the IRS is presently compiling additional guidance, probably in the form of FAQs, that will clarify the application of extended Section 1031 like-kind exchange deadlines pursuant to Section 17 and Notice 2020-23.
Josh D. Morton is a special counsel in Pillsbury’s Real Estate practice. Ivan Mitev is a special counsel in Pillsbury’s Tax practice.
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