How the 1031 Exchange Deadline Extension Impacts Taxpayers

Late last week, the IRS issued guidance in response to COVID-19 that potentially extends the 1031 exchange deadlines for taxpayers. This unprecedented guidance has resulted in a lot of additional questions and confusion. In this article, we wanted to highlight a complex 1031 exchange situation that resulted from this ruling.

Properties No Longer Available

One of our clients submitted their identified properties on March 23, 2019. Now, two of the properties are no longer available due to the coronavirus pandemic. What are the implications of the new deadline changes?

This is a really pertinent question because people that started their exchanges whose identification period ended before April 1 are extremely disadvantaged because many sellers of properties that were identified have pulled their property off the market because they can't show them during the Covid pandemic because their tenants won't let people into the units. Furthermore, they're afraid to sell their properties in down markets so they're pulling them off the market.

IRS Notice 2020-23 appears to only postpone any 45-day or 180-day deadline that occurs between April 1 and July 15, to July 15, 2020.

If your replacement property identification period ended prior to April 1, then there is no change or extension to the identification period; however the 180-day exchange period could be extended if your exchange period would normally end after April 1 and before July 15.

This is still a fluid situation and more information and details may be released by the IRS. We are continuing to monitor the situation.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

Breaking: IRS Extends 1031 Exchange Deadlines

In response to the ongoing COVID-19 pandemic, yesterday, the IRS published Notice 2020-23, which appears to extend important 1031 exchange deadlines.

According to the Notice, if an exchangor's 45-day identification period or 180-day exchange period ends between April 1 and July 15, 2020, then their deadline may be extended until July 15, 2020.

This unusual response from the IRS may be welcome news for taxpayers conducting 1031 exchanges. However, there are a few things that the Notice leaves unclear, such as:

• Whether this relief applies only to 1031 exchangors who still have their exchange proceeds with a qualified intermediary. If an exchangor has already received their proceeds from the intermediary, do they have the option of continuing their exchange now that the deadlines have been extended? For example, if an exchange started on October 5, 2019, and the standard 180-day exchange period ended on April 2, 2020, and the intermediary has returned unused funds to the exchangor, can the exchangor nevertheless continue the exchange under the extended time frames until July 15, 2020, notwithstanding that they've received their funds back?

• Whether this extension is elective or automatic. Does this automatically extend all 1031 exchange deadlines to July 15? What if a taxpayer doesn't wish to extend their deadline that far? Do they have a choice? For example, if an exchangor identified a hotel as their replacement property, which is now unoccupied and undesirable as a purchase because of the coronavirus, and the exchangor has elected not to purchase this replacement property, are they now required to wait until July 15 to get their unused funds back from an exchange that they've decided to forego?

• What does this mean for taxpayers starting new exchanges? For people starting new exchanges on or after April 9, 2020 (when the IRS Notice 2020-23 was released), the extension may push back the date on which their replacement property identification deadline is due. For example, if you close on your relinquished property on April 10, typically, your 45-day identification period ends at midnight on May 25, 2020. Still, with the new extension, July 15 appears to be the new deadline for identification.

We are actively investigating these and other issues so that we can understand how to guide our clients through their 1031 exchanges. As always, I am available to start the conversation at 612.643.1031. I thank you and look forward to continuing the exchange.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

COVID-19 Resources for 1031 Exchanges

The COVID-19 pandemic is sowing confusion in every industry – including real estate. In this article, we are going to offer up some 1031 exchange resources for taxpayers who have questions about 1031 exchanges during this challenging time. Stay tuned to this site for any future updates re: COVID-19 and 1031 exchanges.

45 / 180 Day Calculator

This free online calculator will help you calculate your 1031 exchange deadlines. Remember that you only have 180 days to complete your exchange once you begin (with the first 45 days set aside as your replacement property identification period). It’s possible that these deadlines may be moved due to COVID-19, but we have not received official word from the federal government on that yet.

1031 Glossary

Brush up on your like-kind exchange lingo with our 1031 exchange glossary of terms!

Educational Videos

Want to learn more about 1031 exchanges but don’t want to read? Check out our series of educational videos in which Jeff Peterson answers frequently asked questions on the topic of 1031 exchanges.

Start a 1031 Exchange Today!

Start your 1031 exchange today by contacting a qualified intermediary to get the process rolling. At CPEC1031, our qualified intermediaries have over two decades of experience facilitating exchanges of real estate throughout the United States. We can prepare your documentation for closing, advise you on replacement property, and answer all of your questions along the way. Contact us today at our Minneapolis office or one of our satellite offices around the country to start the process! We’re here to help in any way we can.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

Can you 1031 Exchange Into a Multi-Unit Property & Occupy One of the Units?

There are many questions that come up when it comes to 1031 exchanges of investment property. Here’s one that a client asked us recently: can you 1031 exchange into a multi-unit property and occupy one of the units? 

Combining Section 1031 & Section 121

This is a somewhat complicated situation. In an ideal world, you could split the transaction into a part IRC Section 1031 exchange and part IRC Section 121 sale of the principal residence (so you can exclude some or all of the gain from the principal residence).

The 1031 part is the portion or percentage of the property used exclusively for business or rental.

In order for the principal residence part of the property to qualify for the exclusion the part used for principal residence must meet both the: (1) ownership test and the (2) use test. One is eligible for the exclusion if they have owned and used that portion of the property as their main home for a period aggregating at least two years out of the five years prior to its date of sale. One can satisfy the ownership and use tests during different 2-year periods. However, one must meet both tests during the 5-year period ending on the date of the sale. Generally, a person is not eligible for the exclusion if they have excluded the gain from the sale of another home during the two-year period prior to the sale of the home.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

3 Tips for Reducing Uncertainty in a 1031 Exchange

In any real estate transaction, there is some level of uncertainty involved, and 1031 exchange transactions are no exception. In this article, we are going to discuss how to reduce uncertainty in a 1031 exchange.

Work Closely with Your Qualified Intermediary

The biggest mistake a lot of taxpayers make when it comes to 1031 exchanges is trying to do everything themselves. The best thing you can do is work closely with a qualified intermediary who can walk you through the process and give you all the tools you need to execute a successful exchange.

Start As Early As Possible

In a 1031 exchange time can be your friend or your enemy. There are very strict deadlines that have to be followed in all 1031 exchanges so if you’re scrambling at the eleventh hour, time can really be against you. That’s why it’s best to start working on your exchange as early as possible. Give yourself more prep time than you think you need. Contact your intermediary early in the process and start putting a plan into place.

Line Up Your Replacement Property

Get ahead of the game and start lining up your replacement property early. Once you begin the process, you only have 45 days to identify your replacement property in writing. Doing a little bit of prep work can go a long way in this department.

Like-Kind Exchange Services

At CPEC1031, we offer 1031 exchange services to clients throughout the state of Minnesota and across the United States. Our intermediaries have over two decades of experience and can help you through every step of your transaction. Reach out to us today to learn more about the full range of our services and see how we can help you wit your next exchange. You can find us at our primary office in downtown Minneapolis or at one of our satellite offices around the country.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved