On April 9, the Department of Treasury and Internal Revenue Service released Notice 2020-23, which further expanded deadlines for numerous filings in order to help taxpayers in the wake of the COVID-19 outbreak.
This piggybacks on an IRS revenue procedure (Rev. Proc.) from 2018, providing additional leeway for “time-sensitive” tax transactions (aka 1031 exchanges) that occur under a time of national emergency. It qualifies any taxpayer who is performing a time-sensitive transaction that is due on or after April 1st and before July 15th, 2020 to be a qualifying “affected taxpayer.”
As mentioned, 1031 exchanges are considered time-sensitive and therefore addressed within these deadline extensions. Similarly, Qualified Opportunity Zone investors are eligible for relief, as well.
What Are 1031 Exchanges?
A 1031 exchange is one of the most popular tax tools available for real estate investors. This is a provision of the tax code which allows an investor to exchange like-kind property tax-deferred. Essentially, you can sell one or more rental properties and not pay any tax upon sale as long as you reinvest the proceeds into one or more new properties.
It’s a great tool, but it has some restrictions, especially related to how long the transaction takes.
For more information about 1031 exchanges, check out “What Is a 1031 Exchange (& Should You Use One?)” by Brandon Turner.
Normal 1031 Exchange Deadlines
When you complete a 1031 exchange, there are two key deadlines you need to meet:
- The 45-day identification deadline: You must identify your potential replacement properties within 45 days from the date you close on the sale of your relinquished property.
- The 180-day completion deadline: You must complete your 1031 exchange transaction, which includes the transfer of title, on all replacement property within 180 days from the date you close on the sale of your relinquished property.
If you do not meet these deadlines, it can potentially void your entire exchange—thereby making your property sale fully taxable.
What Are Qualified Opportunity Zones?
Qualified Opportunity Zones (QOZ) are a new tax tool that was put in place by the Tax Cuts and Jobs Act. It basically allows tax deferral on ANY type of capital gain (not just those generated by selling real estate) if the proceeds are reinvested into a Qualified Opportunity Fund (QOF) within 180 days.
A QOF is a qualified entity that is investing or operating within one of the pre-determined qualifying census tracts (zones).
For more information about Qualified Opportunity Zones, check out “What Are Opportunity Zones—and Why Should Real Estate Investors Care?” by Andrew Propst.
Normal Qualified Opportunity Zone Deadlines
To utilize the tax deferment of a QOZ, the requirement is that the proceeds of the capital gain generated must be reinvested in a QOF within 180 days. Only profits need to be reinvested within 180 days—not necessarily the entire sale amount.
Relief for 1031 Exchange Investors and QOZ Investors
Due to the COVID-19 restrictions we are under, some investors may have a hard time meeting the required deadlines related to these two transactions.
It becomes a lot harder to find a replacement property when you can’t attend an open house, and it’s a lot harder to secure financing when banks are changing requirements. It is the hope of the IRS that these extended deadlines will allow people enough time to complete their transactions in the face of these unique challenges.
As always, please make sure to consult your tax professional for guidance related to your specific situation and to ensure that these extended deadlines apply to you.
Yes, this is a lot of tax jargon—so here’s what it comes down to:
- Any 1031 exchange with a deadline between April 1st and July 15th, 2020 is now moved to July 15th, 2020.
- Any QOZ transaction with a deadline between April 1st and July 15th, 2020 is now moved to July 15th, 2020.
For more information on the two IRS documents referenced above, please see the links below.
Let’s discuss in the comment section below.