A properly executed 1031 Exchange allows real estate investors to defer capital gains taxes. By selling a property and buying a like-kind property in accordance with the provisions of Section 1031 of the IRS Code, the capital gains taxes on the sale are deferred. The investor can then use the funds that would have been used to pay the capital gains taxes to invest in the purchase of a new property.
One caveat of the 1031 Exchange process is that investors must strictly comply with the time deadlines.
A real estate investor (or exchangor) interested in availing itself of the tax advantages of a 1031 Exchange has 45 days from the sale of the relinquished property to nominate (identify) a potential replacement property (or up to 3 properties as the replacement property). Once the replacement property is nominated (identified), the exchangor must complete the purchase of the replacement property within 180 days from the date of the sale of the relinquished property. Running afoul of these timeframes means losing the deferral of the capital gains tax on the sale.
The IRS has just announced extensions to both of these time periods in light of the circumstances surrounding the COVID-19 global pandemic. According to an update to Notice 2020-18, any exchangor that has a 45-day identification deadline or a 180-day exchange deadline between April 1, 2020 and July 15, 2020 now has an automatic extension until July 15, 2020.
Note that exchangors with deadlines prior to April 1, 2020 were not afforded any extension of the deadlines. It remains to be seen whether the IRS will further extend these deadlines beyond July 15, 2020.
Should you have any questions on 1031 Exchanges or any other real estate issue, please contact Marcy E. Hamilton at [email protected], any member of the Real Estate & Lending Group, or any other Meyer, Unkovic & Scott attorney with whom you have worked.
This material is for informational purposes only. It is not and should not be solely relied on as legal advice in dealing with any specific situation.
