What’s the new deadline for 1031 swaps? Depends whom you ask

Even after IRS guidance, it’s unclear whether buyers have until July 15 or 120 days to find a replacement property

TRD NATIONAL /
Apr.April 13, 2020 06:45 PM
The IRS guideline for 1031 exchanges isn’t totally clear, professionals say (Credit: iStock)

The IRS guideline for 1031 exchanges isn’t totally clear, professionals say (Credit: iStock)

The Internal Revenue Service has just offered up the one thing investors looking to close 1031 exchanges desperately need – more sand in the hour glass. But legal and tax experts told The Real Deal that there remains widespread confusion as to just how long investors have to finalize deals.

Typically, those who own property through 1031 exchanges have 45 days, after they sell a property, to identify a replacement asset and 180 days to close the deal, in exchange for a tax break for reinvesting in “like-kind” properties. The coronavirus has complicated matters, leading the industry to beg for some sort of extension to those windows.

The IRS last week issued blanket guidelines to a range of taxpayers, extending the deadline on a variety of tax filings — including personal income filings — to July 15. But experts told TRD that the guidance, which also applies to 1031 investors, does not make clear whether July 15 is a hard deadline for 1031 buyers who need replacement properties.

In one camp are professionals who believe that July 15 is the drop-dead deadline for 1031 investors. Others say that the IRS should have reverted to prior guidance that dates back to 2018, which stipulates that in times of disaster — whether it’s a hurricane or tornado — affected investors get an automatic 120-day extension on those deadlines.

“You have two legitimate interpretations in the notice,” said Matthew Rappaport, vice managing partner and a tax attorney at New York-based Falcon Rappaport & Berkman PLLC, who is advising clients of the more conservative, July 15 deadline. “The confusion is real, among really smart people.”

Todd Pajonas, president of Legal 1031 Exchange Services, LLC, sits on the other side of the fence. He argued that the IRS’s usual 120-day guidance should prevail.

“They deviated from what they normally do in a disaster,” he said.

The IRS did not immediately return a request for comment.

But since the notice only appears to impact deals that have a timeline starting after April 1, a slew of pending deals from weeks prior could be at risk, experts said. This could particularly impact deals that involve construction, because many projects have been put on hold, pushing out closings beyond July 15, said David Shechtman, senior counsel at Faegre Drinker Biddle & Reath LLP in Philadelphia.

“If you believe you only have a July 15 hard stop, that’s not of great assistance to a number of taxpayers who are in the midst of exchanges,” he said.

Pressure mounts

While some deals are still getting done, volume is down, and it is taking longer to close transactions, insiders said.

The normal time period to secure a loan and close a 1031 deal has slowed, said Christopher Marks, a commercial debt broker for Marcus & Millichap Capital Corporation in Manhattan, putting pressure on professionals working on time-sensitive deals.

And that’s not just because it has become harder to verify properties in person. Banks are dealing with hundreds of thousands of loan-modification inquiries and Small Business Administration loans because of the coronavirus, Marks said.

“They don’t have the manpower to deal with the overwhelming demand,” he added.

Some lenders also have cut back on issuing new loans, and commercial mortgage-backed securities and conduit lenders have all but disappeared, Pajonas said. Underwriting also has become more restrictive, particularly as it is hard to get professionals to properties to conduct due diligence, he added.

Still, several experts said they are hopeful that the IRS will come out with more specific regulations soon.

“This notice is a stop-gap notice, is the way I see it,” Rappaport said. “This crisis is not over. This is not the last round of extension guidance the IRS is going to come out with.”

Write to Mary Diduch at [email protected]


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