IRS Expanded Deadline Relief, Including Relief for Section 1031 Exchanges; Prior Section 163(j) Elections

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IRS Expanded Deadline Relief, Including Relief for Section 1031 Exchanges; Prior Section 163(j) Elections

Expanded Deadline Relief

On April 9, 2020, the IRS issued Notice 2020-23 (the “Notice”) to expand the list of Federal filing, payment, and other statutory deadlines that are automatically extended due to the COVID-19 crisis.  The Notice provides that any person (human, entity, trust, estate, etc.) that has a Federal tax payment, a Federal tax return, or a specified time-sensitive action described in the Notice that would otherwise be due on or after April 1, 2020, and before July 15, 2020, will be granted an automatic extension until July 15, 2020.  The Notice describes several deadlines that qualify for this extension, including: quarterly estimated tax payments that would otherwise be due between April 1, 2020 and July 15, 2020 (for example, the second 2020 estimated tax payment for individuals that would otherwise be due by June 15, 2020); Section 1031 (and reverse Section 1031)-related deadlines that would otherwise occur between April 1, 2020 and July 15, 2020 (more on this below); and the 180-day time period within which to invest funds with a qualified opportunity fund.  The relief is automatic: Taxpayers do not have to file any forms, letters or documents to receive the relief.  However, if taxpayers need additional time, they can file the appropriate forms to receive standard regulatory extensions.  A full list of extended deadlines can be found in the Notice.

The current status of the forward and reverse Section 1031 exchange deadline extensions is unclear:  On the one hand, it is clear that a 45-day identification period that would otherwise run out on or after April 1, 2020 and before July 15, 2020 is extended to at least July 15, 2020.  It is also clear that a 180-day exchange period that would otherwise run out on or after April 1, 2020 and before July 15, 2020 is similarly extended.  However, it is possible that the IRS actually extended these deadlines by 120 days from whenever they would otherwise have run out.  In many circumstances, that would move a deadline past July 15, 2020.  The support for extensions by 120 days in the context of Federally declared disasters is found in Revenue Procedure 2018-58 (the “Revenue Procedure”).  The Notice mentions the Revenue Procedure but it does not clearly call for its application. We hope that the IRS will provide clarification on this issue, and sooner rather than later. 

Other ambiguities remain: For instance, the Notice also does not address how to treat an exchange that has already unwound because of a missed deadline.  For example, assume that an exchanger in a forward exchange was required to identify replacement property by April 6, 2020, and did not timely identify any possible replacement properties.  As a result, the qualified intermediary distributed the exchange proceeds to the exchanger on April 7, 2020.  Will that exchanger be allowed to retroactively revive the exchange and apply the Notice’s July 15, 2020, extension so as to have more time to identify possible replacement properties?

While the Notice provides exchangers with some comfort with respect to their existing Section 1031 exchanges, questions remain.  We will keep you updated as we learn more, but please do not hesitate to contact us directly if you have any questions or would like to discuss these issues in more detail.

Prior Section 163(j) Elections

As noted in our previous Client Alert, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act made changes to the business interest deduction limitation under Section 163(j).  Certain taxpayers previously avoided the Tax Cuts and Jobs Act (“TCJA”) limits on deducting business interest by electing to be treated as a “real property trade or business.” The election to be treated as a real property trade or business is normally irrevocable, but given the new changes under the CARES Act, many taxpayers were hopeful the IRS would allow them to revisit this prior election. 

Under Revenue Procedure 2020-22, issued late on April 10, 2020, the IRS provides an opportunity for certain taxpayers to withdraw a prior election to be a real property trade or business. If a taxpayer withdraws an election within the manner outlined in the revenue procedure, the taxpayer will be treated as if the election was never made. Therefore, taxpayers that previously made this election will have the opportunity to revisit whether such an election is still beneficial under the changes contained in the CARES Act.  For example, in light of the CARES Act fix for “qualified improvement property,” taxpayers may now wish to determine whether withdrawing the election will permit such property to be immediately expensed (with retroactive effect). 

Revenue Procedure 2020-22 also provides guidance on various other elections related to the limitation on business interest deductions, including how to elect (1) out of the 50 percent adjusted taxable income (“ATI”) limitation for taxable years beginning in 2019 and 2020, (2) to use the taxpayer’s ATI for the last taxable year beginning in 2019 to calculate the taxpayer’s section 163(j) limitation for taxable year 2020, and (3) out of deducting 50 percent of excess business interest expense for taxable years beginning in 2020 without limitation.  A copy of Revenue Procedure 2020-22 can be found here.

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