The IRS Extends the 45-Day and 180-Day Deadlines for Section 1031 Exchanges Initiated Before March 13, 2020 and the Deadline to Reinvest Eligible Gains in a Qualified Opportunity Zone Fund Affected by COVID-19

Sign up for our Coronavirus roundup email.
Visit our Coronavirus resource page.

On April 9, 2020, following issuance by the President of the United States of an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act on March 13, 2020, the Secretary of the U.S. Department of Treasury (the “Secretary”) and the Internal Revenue Service (the “IRS”) issued Notice 2020-23 (the “Notice”). Among other things, the Notice extends the deadline for taxpayers who (1) sold real estate before March 13, 2020 in a transaction structured as a tax-deferred exchange under section 1031 of the Internal Revenue Code of 1986 (a “Section 1031 Exchange”), to identify replacement property (which normally must be completed within 45 days of the sale) or to purchase replacement property (which normally must be completed within 180 days of the sale) if the identification or purchase were due to be performed on or after April 1, 2020 and before July 15, 2020 (the “Covered Period”) for 120 days (but in no event beyond the due date (including extensions) of the taxpayer's tax return for the year of the transfer), (2) purchased real estate before March 13, 2020 in a transaction structured as a Section 1031 Exchange to identify relinquished property (which normally must be completed within 45 days of the purchase) or to sell relinquished property (which normally must be completed within 180 days of the purchase) if the identification or sale were due to be performed during the Covered Period for 120 days (but in no event beyond the due date (including extensions) of the taxpayer's tax return for the year of the transfer), and (3) sold property with eligible gain to reinvest cash equal to the eligible gain by purchasing an interest in a qualified opportunity fund (a “QOF”) (which normally must be completed, generally speaking, within 180-days of the sale) until July 15, 2020.

Seyfarth Observations

As to Section 1031 Exchanges, the Notice provides welcome relief for investors whose exchanges have been impacted by the COVID-19 pandemic. As to QOF investments, however, the Notice is incomplete. First, many investors have gains (either directly or through pass-through entities that they own) treated as arising on December 31 of a year, and accordingly the deadline extension for those investors provides merely a few additional days (June 28 to now July 15, 2020) to invest in a QOF than they otherwise would have had. Second, and more importantly, QOF investments have several other tolling elements, including (a) the dates on which a QOF must have 90% of its assets in qualified opportunity zone property, (b) the “written plan” pursuant to which a qualified opportunity zone business must deploy its working capital. As to these and other time-measured elements of QOF compliance, no advice has yet been given by the IRS. Accordingly, QOFs and their investors must continue to wait for relief for these and other deadlines not addressed by the Notice.