In the Middle of a 1031 Exchange? Be Patient.

1031 exchanges are stressful when we aren’t in a pandemic—but today, the process of completing a 1031 exchange is nearly impossible. Thankfully, the IRS released guidance earlier this month and extended deadlines on several 1031 milestones to help relieve investors in the process of an exchange. Phil Jelsma of Crosbie Gliner Schiffman Southard & Swanson recommends investors be patient and trust that these deals will make it through.

“It is difficult to acquire and finance projects during any unanticipated crisis—as evidenced by the COVID-19 pandemic—but things will get easier and improve over time,” Jelsma, a partner at the firm, tells GlobeSt.com. “Over the last few weeks the Internal Revenue Service, has provided taxpayers with multiple deadline extensions, providing some financial relief amidst the COVID-19 outbreak.”

The deadline extensions handed down from the IRS includes tax deadlines that apply to both 1031 exchanges and opportunity zone projects. The new deadline extends the standard 45 days of the sale to identify a replacement property and 180 days to complete the acquisition. “The Notice extends both the 45-day deadline and the 180-day deadline—if those deadlines would have expired on or after April 1, 2020 to July 15, 2020,” explains Jelsma. “Thus, if the investor’s identification period was open as of April 1, 2020, it is automatically extended to July 15, 2020. Similarly, if the 45‑day identification period had expired before April 1, 2020 but the 180-day exchange period was open as of April 1, 2020, the 180-day exchange period is extended to July 15, 2020.”

While extending the deadlines was necessary as a result of the pandemic, which has shutdown large swaths of the market, Jelsma says that this will, no doubt, have some side effects.

Read It’s a Struggle to Understand the IRS’ Guidance for 1031 Extensions

Jelsma offers a number of examples:

• If the sale of a replacement property occurred on March 3, 2020, the 45th day would have been May 17, 2020 and the 180-day exchange period would have expired on July 1, 2020. As a result of the Notice, the date for identifying replacement property remains February 17 but the 180-day exchange period is extended from July 1, 2020 to July 15, 2020.
• If the sale took place on April 1, 2020, the 45th day would have been May 16, 2020. The period for identifying the replacement property is extended from May 16, 2020 to July 15, 2020 but the property would still need to be acquired by September 28, 2020.
• If the taxpayer’s relinquished property sold on January 23, 2020, the 45-day identification period would expire on March 8, 2020 and the 180-day exchange period would expire on July 21, 2020. This exchange is not impacted or benefited at all by the issuance of the notice.

For reverse exchanges, the same deadline extensions apply, meaning the owner must choose a property for sale within 45 days, and the exchange must be complete within 180 days.