Extension of Deadlines for 1031 Exchanges (and Some Ambiguity)

The IRS announced extensions for certain time-sensitive actions, including 1031 exchanges, due to the COVID-19 pandemic. While there is some ambiguity in the guidance provided, the IRS has indicated that the deadlines to identify and close on replacement properties has been extended through at least July 15, 2020, for any deadlines that had originally fallen between April 1st and July 15th.

Where’s the ambiguity in that?

Well, there was an earlier announcement that extended these deadlines by 120 days. The current interpretation of these conflicting guidelines is that the extended deadline is 120 days after the original deadline or July 15th, 2020, whichever is sooner. Check back for updates on this, as we expect the IRS to issue a clarifying statement in the near future.

What is a 1031 exchange?

If you’ve made it this far and aren’t sure, thanks for sticking around! In short, a 1031 exchange allows you to sell a piece of real estate that you held as an investment (i.e. a rental property, not your primary residence or vacation home) and, instead of keeping the cash and paying tax on your gain, you quickly reinvest the proceeds from the sale of the property into a new investment property and by doing so defer paying tax on some or all of the gain until you eventually sell the new property.

When doing a 1031 exchange, there are two deadlines that, if not met, will blow up the exchange and force you to pay tax on the gain from the sale of the original property. Under normal circumstances you have 45 days to identify options for a replacement property and 180 days to close on the purchase of the new property. It is these two deadlines that have been extended due to the pandemic.

In conclusion…

This is welcome relief to taxpayers who were in the middle of an exchange when the pandemic hit and risked missing their ID or closing deadlines and blowing their exchange. Like much of the recent guidance the IRS has been forced to issue in haste, there are ambiguities and uncertainties that will have to be clarified, so check back for updates on this and other topics. If you are involved in a 1031 exchange, you should be in contact with your Qualified Intermediary to confirm the applicable deadlines for your exchange. As always, don’t hesitate to reach out with any questions, thoughts, or concerns. Stay safe!