Can You Get an Extension on 1031 Exchange Deadlines?
The COVID-19 virus pandemic has increased the uncertainties associated with successful completion of 1031 exchanges. Sellers who either are contemplating an exchange or already have begun one without yet reaching the 45-day or 180-day milestones may be anticipating problems. They may now be asking themselves, as they run up against their deadlines, whether they can somehow get around the 1031 deadlines and get more time in the form of an extension.
One measure of this sentiment is the spike in 1031-related visits to our company web site. We have seen an increase in site visitors who have found us by Googling search terms like these:
Is there any way you can extend a 1031 exchange?
Can you get an 1031 exchange extension for your 45-day identification period?
Can you extend a 1031 exchange past 180 days for the closing period?
These search terms indicate curiosity, and perhaps anxiety, about having to pay capital gains tax if a 1031 exchange fails due to expiration of 1031 exchange deadlines. Would-be property exchangers are seeking to learn what can be done about these restrictive 1031 exchange rules and timelines. These rules can be burdensome even during relatively normal times. With the COVID-19 pandemic upon us, many market participants may become reluctant to transact, increasing the difficulties for sellers who need to find and close on replacement property within tight deadlines.
Especially for those involved in exchanges right now, the question is whether anything can be done about their 1031 exchange expiration dates if they cannot successfully identify and close on replacement property within the IRS-mandated exchange deadlines of 45 days and 180 days.
Does the IRS allow extensions of 1031 exchanges?
After petitioning by numerous commercial real estate organizations as reported in Bisnow, extensions for Section 1031 “Like-Kind Exchange” deadlines have been granted by the IRS, as announced in IRS Notice 2020-23 released on April 9, 2020.
The notice provides for automatic extensions until July 15, 2020 of the 45-day and 180-day periods.
But what exactly does this mean? Who qualifies? Who benefits? What if your 1031 exchange does not qualify for an extension?
Qualifying for and Benefitting From a 1031 Exchange Extension
Taxpayers will obtain extra time under the new policy if their 45-day identification period expires on or after April 1, 2020 and before July 15, 2020. They now have until July 15th to identify replacement property.
Taxpayers will obtain extra time under the new policy if their 180-day closing period expires on or after April 1, 2020 and before July 15, 2020. They now have until July 15 to complete their exchanges (assuming the due date of the return, including extensions obtained) is not before July 15, 2020.
Who Does Not Benefit from the 1031 Exchange Extension?
No extensions are granted if a taxpayer’s 45-day or 180-day period expired before April 1.
Taxpayers will not benefit from this extension if their 45-day deadline falls after July 15.
For taxpayers who initiate exchanges on or after June 1st, the usual 45-day and 180-day deadlines will once again be in force as the fixed-date extension of July 15 in Notice 2020-23 would no longer apply to transactions commencing on or after that date.
What if you Can't Get a 1031 Exchange Deadline Extension?
While it’s better than nothing, the new IRS 1031 exchange extension applies to transactions falling within a narrow set of circumstances and is likely to benefit only a small number of taxpayers who began their transactions within short span of a few weeks corresponding to the COVID-19 outbreak.
What if your 1031 exchange does not qualify for an extension, and you still want to defer your capital gains tax? Or what if your exchange qualifies for a postponed deadline, but you anticipate that you still would need more time than the extension provides? How can you avoid having to pay capital gains tax?
Fortunately, there is an alternative that may be acceptable, or even better than a 1031 exchange.
Here's what to do if if the IRS does not grant extensions, or if you don't qualify for any extensions the IRS might offer to some taxpayers. It's possible to defer your capital gains tax even if you can't complete an exchange, and instead exit with cash instead of replacement property.
A 1031 Exchange Alternative That Defers Capital Gains Tax and Gives You Cash at Closing
There’s a little-known technique of selling real estate that provides sellers with a way around the rules and time limits of 1031 exchanges. It is often used as either an alternative exit strategy to a 1031 exchange or as a backup plan, to preserve tax deferral when an exchange currently underway appears likely to fail due to inability to meet a 1031 exchange deadline.
This way of selling real estate provides these outcomes for the seller:
Capital gains tax is deferred for 30 years.
The seller walks away with cash equivalent to approximately 93.5% of their net sales proceeds, which may be invested, without limitation, in other real estate or non-real estate investments.
There are no rules or limitations with this method that normally encumber 1031 exchange transactions, including no deadlines, no like-kind property rules, no boot issues, etc.
This option provides immediate liquidity in the form of tax-free cash, which lets the seller stay on the sidelines if they wish, and, if desired buy other real estate at their leisure, without being restricted by any deadlines.
Long-term capital gains tax deferral can be likened to a large tax cut. The time value of money, allowed to operate over 30 years, brings the present-day equivalent tax cost down to a small fraction of its nominal cost to be paid three decades in the future.
WANT TO LEARN MORE?
How to Defer Capital Gains Tax for 30 Years and
Simultaneously Obtain Cash Equal to 93.5% of Your Net Sales Proceeds