Key Tax Extensions for Real Estate Developers
The Department of Treasury and the Internal Revenue Service (the “IRS”) have issued IRS Notice 2020-23 (the “Notice”), which extends several deadlines that fall between April 1, 2020 and July 15, 2020. https://www.irs.gov/pub/irs-drop/n-20-23.pdf. The IRS has changed the deadlines referenced in the Notice to July 15, 2020. Two key provisions in the Internal Revenue Code (the “Code”) provide valuable incentives for real estate developers. However, these provisions have very specific deadlines that may be or may have been disrupted by the COVID-19 pandemic, despite the developers’ best efforts.
Section 1031 of the Code provides that a taxpayer who exchanges real property held for productive use in a trade or business or for investment (the relinquished property) for real property of a like kind to be held either for productive use in a trade or business or for investment (the replacement property) (a “Like-Kind Exchange” or “LKE”) does not recognize gain at the time of the exchange. The gain is deferred if the LKE requirements are met.
Two of the key requirements for an LKE are that the taxpayer must (1) identify the replacement property within 45 days of the sale of the relinquished property, and (2) acquire the replacement property within 180 days of the sale of the relinquished property. If either of these deadlines would have occurred on or after April 1, 2020 and on or before July 15, 2020, the Notice provides that such deadlines are now July 15, 2020.
The procedural statute and relevant guidance referenced in the Notice generally require a transaction to have begun before a President declares an emergency that prompts an extension of a deadline. The Notice references the President’s emergency declaration of March 13, 2020, so the first step of an LKE likely had to occur before March 13, 2020 to take advantage of the Notice. Additional guidance may be issued, but following that assumption would be prudent in the meantime.
Qualified Opportunity Funds
Similarly, Section 1400Z-2 of the Code provides tax benefits to taxpayers who have engaged in capital gain transactions if they invest in a qualified opportunity fund (a “QOF”) within 180 days of triggering the gain. Such taxpayers can defer the capital gains to the extent they invest such amounts in a QOF. Such investors can also avoid taxable gain upon the liquidation of the QOF if they hold their interest in the QOF for at least 10 years and other requirements are met. For any capital gain amount required to be invested by a date between April 1, 2020 and July 15, 2020, the Notice has extended the 180-day deadline for investing in the QOF to July 15, 2020.
RMG will continue to monitor guidance and other developments in these areas. Call us if you would like additional information.