Deadlines Extended for 1031 Exchanges and Opportunity Zone Investors
The Internal Revenue Service (“IRS”) recently issued Notice 2020-23, postponing deadlines for section 1031 exchanges and reinvestments in Qualified Opportunity Funds. The Notice provides that affected taxpayers have until July 15, 2020, to perform certain time-sensitive actions that are due to be performed on or after April 1, 2020, and before July 15, 2020. This extension is due to the COVID-19 pandemic and gives investors some breathing room.
Section 1031 Like-Kind Exchanges
If an investor is already in the process of engaging in a like-kind exchange, the investor may take advantage of the July 15 date for either of two required steps in an exchange:
- 45-day identification period. The postponed due date applies to the 45-day period to identify replacement property if that period began between February 16, 2020, and May 31, 2020. For these exchanges, investors will have until July 15 to identify replacement property.
- 180-day replacement period. The postponed due date applies to the 180-day period to replace exchanged property if that period began between October 4, 2019, and January 17, 2020. For these investors, the replacement period is postponed to July 15, 2020.
Note, a taxpayer can choose to opt-out of the postponement and identify replacement properties or close on the acquisition of replacement property before July 15, 2020.
Qualified Opportunity Fund Investments
An investor that sold a capital asset and plans to invest those capital gains in a Qualified Opportunity Fund (“QOF”) also received a postponement under Notice 2020-23. In accordance with section 1400Z-2, investors have a 180-day period to invest gains into a QOF and defer tax on the reinvested gains. Notice 2020-23 postpones the deadline for investment in a QOF to July 15, 2020, for any 180-day investment period that ends between April 1, 2020, and July 14, 2020. This extension will give taxpayers some relief if their QOF investment window has closed or is about to close.
QOFs receiving investment gains from taxpayers after June 30, 2020, will have until June 30, 2021, to invest those gains in qualified opportunity zone property. During the first six months following receipt, no investment is required by the QOF. However, the QOF needs to invest in qualified opportunity zone property prior to the next semi-annual testing date, which is June 30, 2021.
The postponed deadline of July 15, while helpful, is less than the usual 120-day extension granted to taxpayers after natural disasters such as hurricanes, wildfires, and floods. Tax professionals are requesting clarification and a further extension from the IRS as the July 15 deadline in Notice 2020-23 may not be enough time to make prudent investment decisions in these uncertain times. However, this current Notice is a step in the right direction.
Whether acquiring a replacement real estate property or adding an Opportunity Zone project to your investment portfolio, Cherry Bekaert can guide you through the process of selecting the right ones for your risk tolerance and overall tax and financial planning strategy.
Investors should consult with your Cherry Bekaert professional who can help you evaluate the effect of these new deadlines.