How Covid–19 Will Affect Selling a Property and Using the Proceeds for a 1031 Tax Deferral Exchange

Many of our NAI Miami clients have asked about how this Covid – 19 Virus pandemic will affect them when selling a property and then using the proceeds for a 1031 Tax Deferral Exchange. Though the IRS has not issued a proclamation of a federally declared disaster, we believe the IRS will make the proclamation shortly. The IRS during a federally declared disaster will allow the Seller to extend the time periods so long as the sale was completed before the IRS News Release stated in the information below. The time period extensions have to meet several conditions to be allowed extensions outlined in the information. This is a guide and NAI Miami recommends that you contact your accountants and other financial advisors on how to proceed with your 1031 exchange. Please contact us with any questions.

The Internal Revenue Service (“IRS”) provides insight into this question in its Revenue Procedure 2018-58 (the “Revenue Procedure”). The Revenue Procedure allows extensions to such 1031 deadlines in cases of federally declared disasters, but only if the IRS releases an IRS News Release or other guideline authorizing the Revenue Procedure to go into effect. So far, no such publication has been released, but it is possible that will change if the outbreak continues and markets become more unstable. So, for now the 1031 deadlines are still in effect, but real estate investors may want to pay close attention to IRS news releases to see if that changes.

In the event the IRS releases a publication effecting the Revenue Procedure, taxpayers may anticipate the following extensions to go into effect. If the end of a 45 or 180 deadline period falls on or after a date a federal disaster has been declared, the deadline can be extended until the later of: (i) 120 days and (ii) the last day of the general disaster extension period as indicated by the IRS News Release or other guidance which announced tax relief for victims of that particular federally declared disaster. However, it is important for taxpayers to recognize that the above extensions can be cut short; they may never extend beyond: (x) the taxpayer’s tax return due date, including any extension, for the year in which the transfer took place or (y) one year.

To qualify for the above extensions during federally declared disasters, sellers of real property also must meet one of the following criteria:

  • The sold property must have been sold on or prior to the date of the federally declared disaster
  • The taxpayer seeking the extension must be defined as an “affected taxpayer” as will be defined in the IRS News Release or other guidance announcing the tax relief
  • The taxpayer has difficulty making the 45- or 80-day deadline due to the federally declared disaster for the following, or similar, reasons:
  • The sold or replacement property is in the area covered by the disaster
  • The principal place of one of the parties in the transaction is in the disaster area
  • A party to the transaction is killed, injured or missing due to the disaster
  • A document prepared for the transaction is destroyed, damaged or lost as a result of the disaster
  • A lender decides not to fund the closing due to the disaster; or
  • A title insurance company is unable to provide the required title insurance due to the disaster.

If the federal government declares a disaster and the Revenue Procedure goes into effect, the entire United States will likely be within the federally declared disaster area, and some of the other reasons above may also be applicable. Therefore, many involved in 1031 like kind transactions may find some relief from the normally tighter deadlines imposed on them during such transactions.