US Department of the Treasury. Photo by Shutterstock.

The Internal Revenue Service is aware that taxpayers who structure the sale of their real estate transactions as a 1031 exchange must adhere to strict time deadlines requiring them to identify and purchase replacement property. They are also well aware that when there is a federally declared disaster those affected taxpayers will need extra time to complete their transactions. The relief for these affected taxpayers is spelled out, in detail, in Revenue Procedure 2018-58, Section 17.

In response to the Covid-19 pandemic the IRS issued Notice 2020-23 which provides, among other relief, an extension of the deadlines for those taxpayers who have 1031 time deadlines falling between April 1, 2020 and July 15, 2020. Unfortunately, this much-needed announcement has been marred by a departure from standard language, causing tax and legal professionals to debate the nature of the relief that the Notice granted.

Historically, when the IRS issues a notice providing for an extension of the 45-day identification period, and the 180-day period in which to purchase replacement property, they use a standard format. For example, a June 19, 2019 disaster notice for taxpayers in Ohio read "[the relief described in section 17 of Rev. Proc. 2018-58, pertaining to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above."

Contrast the previously used language with the current IRS Notice 2020-23, which is specific to the Covid-19 pandemic, and uses the following language "…[A]ny person performing a time-sensitive action listed in…Revenue Procedure 2018-58…which is due to be performed on or after April 1, 2020, and before July 15, 2020, is an Affected Taxpayer."

In the current Notice, which provided for extensions of various tax deadlines due to the Covid-19 pandemic, in addition to the 1031 deadlines, the IRS failed to specifically mention Section 17 or like-kind exchanges, but merely referred Rev. Proc. 2018-58 in its entirety. Some tax and legal advisors think Rev. Proc. 2018-58 does not control the extension with respect to 1031 deadlines because of the Notice's failure to specifically mention Section 17 or like-kind exchanges. In addition, some tax and legal advisors look to Section III.C. of the notice which provides in part: "Affected Taxpayers also have until July 15, 2020, to perform all Specified Time-Sensitive Actions, that are due to be performed on or after April 1, 2020, and before July 15, 2020." The thought is that this language trumps the language in Rev. Proc. 2018-58 which, specific to 1031 exchanges, provides that taxpayers get the greater of 120-days, or the last day of the disaster extension period authorized by the IRS guidance, whichever is later, even though the July 15, 2020 date specified in the Notice is most times a much shorter period.

Accordingly, taxpayers who have to either identify or purchase property between the April 1 and July 15 time period must now choose whether their deadline to perform an action is the July 15, 2020 date specified in Notice 2020-23, or whether Rev. Proc. 2018-58 controls, providing for a 120-day extension to perform an action. It appears that a majority of the 1031 industry believes that the more restrictive provisions of Notice 2020-23 control the extension for 1031 exchange taxpayers. However, a minority of the 1031 industry believes that Rev. Proc. 2018-58 still controls and provides for a longer 120-day extension period.

1031 Extension Rules Consistent with Notice 2020-23

• If either the 45 or 180-day time deadline for an exchange falls between April 1 and July 15 that deadline (not both) is extended until July 15.
• The 45-day identification period for any exchange begun between February 16, 2020 and May 31, 2020 would have until July 15, 2020 to make their identification. Any exchanges begun June 1, 2020 or later would not receive any extra time in which to identify.
• The 180-day period for any exchange begun between October 4, 2019 and January 17, 2020 is extended until July 15, 2020. Any exchanges begun January 18, 2020 or later would not receive any extra time to purchase replacement property.
• If a taxpayer sells between Jan. 17, 2020 and Feb. 16, 2020, they will not receive an extension of either the 45-day ID period or 180-day period in which to buy replacement property.

1031 Extension Rules Consistent with Revenue Procedure 2018-58

• If either the 45 or 180-day time deadline for an exchange falls between April 1 and July 15 the taxpayer is an "Affected Party" and they benefit from any extensions provided in Rev. Proc. 2018-58.
• The 45-day identification period for any exchange begun between February 16, 2020 and May 31, 2020, would be eligible to receive an extra 120-days to identify and purchase replacement property.
• The 180-day period for any exchange begun between October 4, 2019 and January 17, 2020, would receive an additional 120-days in which to purchase replacement property.
• If a taxpayer sells between Jan. 17, 2020 and Feb. 16, 2020, they will not receive an extension of either the 45-day ID period or 180-day period in which to buy replacement property.

Potential Relief Consistent with Both Notice 2020-23 and Rev. Proc. 2018-58?

• Rev. Proc. 2018-58 permits the revision of replacement property identifications for taxpayers who are past their 45-day ID period for the date of the disaster declaration, if the property was "substantially damaged by the disaster."
• This language contemplates physical damage, such as damage from a hurricane, tornado, flood or fire, and does not contemplate whether a pandemic, and a subsequent quarantine order, could be considered damage.
• Although the IRS Notice does not expand upon this concept, taxpayers could potentially make this argument, however, it would most likely be considered a less than conservative position.

Unless and until the IRS provides further guidance for those taxpayers who will have a 1031 exchange deadline fall between the April 1, 2020 and July 15, 2020 period of time specified in the recent IRS Notice specific to the Covid-19 pandemic, these taxpayers will be forced to interpret the IRS' guidance and choose what extension of time they might receive. Although the Covid-19 is an event of historic proportions, there is nothing substantially different in its effect on the real estate industry which would necessitate or warrant a deviation from the language contained in Rev. Proc. 2018-58. If the IRS decides to clarify this Notice, we hope that they would confirm that taxpayers may avail themselves of the longer 120-day period for both deadlines.

Todd R. Pajonas, Esq. is president of Legal 1031 Exchange Services, LLC, a national qualified intermediary for 1031 exchanges. He can be contacted at [email protected].