COVID-19 and Like-Kind Exchanges and Opportunity Zone Investments
In several states, State and local authorities have issued shelter in place orders. In addition, many businesses have either shut down or have instructed their employees to work remotely. We have received several inquiries regarding whether the complications and delays in the real estate industry affect taxpayers engaged in a like-kind exchange.
In general, the conditions that must be satisfied to complete a tax-deferred like-kind exchange are set forth in Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”). Among these requirements is that the exchanging taxpayer must identify potential replacement properties within 45 days of the sale of the relinquished property and to acquire one or more of the replacement properties so identified with 180 days of the of the sale of the relinquished property.
On April 9, 2020, an Extension of the Deadlines for Like-Kind Exchange Was Announced
On April 9, 2020, the IRS issued Notice 2020-13 in which the IRS extended a number of deadlines for tax return filings and a select number of deadlines imposed under the Internal Revenue Code. Among the deadlines addressed in Notice 2020-13 were the 45-day identification periods and the 180-day exchange periods set forth in the like kind exchange rules of Code Section 1031. Under Notice 2020-13, if expiration of the applicable the taxpayer’s 45-day identification period is a date that is within the period starting on April 1, 2020 and ending on July 14, 2020, the 45-day identification period is automatically extended to end on July 15, 2020. Similarly, under Notice 2020-13, if expiration of the applicable the taxpayer’s 180-day exchange period is a date that is within the period starting on April 1, 2020 and ending on July 14, 2020, the 180-day exchange period is automatically extended to end on July 15, 2020.
It is important to note that even if the taxpayer’s 45-day identification period is extended to July 15, 2020 under Notice 2020-13, the relief in this IRS notice will not extend the 180-day exchange period if the expiration of that period ends after July 14, 2020. For example, if a taxpayer disposed of its relinquished property in a like kind exchange on March 1, 2020, the 45-day identification period would be extended to July 15, 2020. However, the taxpayer’s 180-day exchange period would not be extended and would end in August.
Effect on Opportunity Zone Investments
Notice 2020-13 also addressed deadlines for investment of qualified capital gains in qualified opportunity funds. Generally a taxpayer that has capital gains from the sale of any property has 180 days from the date of the sale to invest the gains in an opportunity fund. Gains recognized through a pass-through entity also can be invested within 180 days from the last day of the pass-through entity’s tax year, or within 180 days from the due date (not including extension) of the entity’s tax return for the year of the gain. Notice 2020-13 extends the deadline to July 15, 2020 for any 180-day period that ends between April 1, 2020 and July 15, 2020. This is a fairly narrow extension, but does give investors whose investment window has just expired or is about to expire some relief, and the new deadline could well be extended. Moreover, because of the qualification rules for opportunity funds, opportunity funds receiving gains subject to this extension after July 1, 2020 will have until June 30, 2021 (and possibly until December 31, 2021) to invest the gains in an opportunity zone investment.