The Internal Revenue Service (IRS) threw out another lifeline to real estate investors and the economic development community last week by extending tax deadlines this year for two key programs, one longstanding and the other quite new.
Because of the difficulty in closing real estate transactions, the IRS issued guidance on Thursday, April 9, that extended deadlines for 1031 like-kind exchanges and opportunity zone investments for transactions underway but not yet completed.
Both deadlines were extended under the Treasury Department's authority triggered by the president's declaration of a national emergency on March 13, 2020.
1031 like-kind exchanges
Like-kind exchanges have been part of U.S. tax law since the 1920s and allow the exchange of one investment of business-use property for another of like kind without an immediate tax liability. Sale of the original property to close on the second has to take place within 180 days to earn the deferral.
Title companies, law offices, and other key players in the closing process are closed or greatly limited right now as a result of the coronavirus, making it difficult to impossible to meet that timeline, the National Association of Realtors (NAR) said in a letter to the Treasury Department advocating for the extension. The same goes for the 45-day period for identifying possible properties as exchange candidates.
"Without relief, missing these deadlines could invalidate the deferral treatment promised by section 1031 due to no fault of the taxpayer," the NAR argued.
The IRS agreed, extending the 45-day deadline for identifying which property to exchange and the 180-day deadline for closing on the new property if the deadline for either falls between April 1 and July 15 and the older property has already been sold.
Opportunity zones are a much newer program. Created by the Tax Cuts and Jobs Act of 2017, they provide preferential tax treatment for investments, ideally of the job-creating kind, made in economically distressed communities through qualified opportunity funds.
The IRS relief announced last week allows investors seeking to place the gain from the sale of a capital asset into an opportunity fund to make that investment as late as July 15 if their 180-day deadline falls between April 1 and that date.
The IRS had just issued final guidance for the opportunity zone program in December. The agency has an easy-to-read explanation of the program -- including the tax break itself and where the zones exist -- here. And here is the full text of Notice 2020-23 that lays out details of the deadline extension.
Meanwhile, a Millionacres article from September provides a clear explanation of opportunity funds, many of which were still being created at that point. The Novogradac consultancy is the host of the Opportunity Zones Working Group and maintains a list of operating opportunity funds online here.
The new April 15