IRS Extends 1031 Exchange Deadline

Apr 16, 2020

As of April 9, 2020, the IRS extended the 1031 exchange deadline. Notice 2020-23, the latest notice added to the Taxpayer Coronavirus Relief Plan, provides temporary timeline relief to taxpayers currently engaged in a 1031 exchange.

In normal times, the 1031 exchange mandates that when you sell an existing investment property with the intent to exchange it for a new one, the prospective property must be identified in writing within 45 days of selling your original property.

It also requires the new property transaction to be closed within 180 days from the sale of your original property, or by your tax return due date for the year in which the transfer of the old property takes place, whichever arrives first.

Now, due to the difficulty in performing business transactions, Notice 2020-23 states that “Affected Taxpayers have until July 15, 2020, to perform all Specified Time-Sensitive Actions that are due to be performed on or after April 1, 2020, and before July 15, 2020.”

Affected Taxpayers Get a §1031 Extension

What does this mean for you? If you are in the midst of performing a time-sensitive action listed in either §301.7508A-1(c)(1)(iv) – (vi) of the Procedure and Administration Regulations or Revenue Procedure 2018-58, 2018-50 IRB 990, you are considered by the IRS an “Affected Taxpayer.”

As an Affected Taxpayer, the deadline for you to identify and/or acquire a replacement property using §1031 is now July 15, 2020, unless your 45-day identification deadline and 180-day exchange period were before April 1, 2020. Here are two examples of how this might pertain to your situation:

  • If your 45-day identification period falls between 4/1/2020 and 7/15/2020, you have until 7/15/2020 to identify a prospective replacement property.
  • If your 180-day closing deadline falls between 4/1/2020 and 7/15/2020, you have until 7/15/2020 to complete the transaction.

What If You Want to Start an Exchange Now?

According to Notice 2020-23 of the Taxpayer Coronavirus Relief Plan, you may begin an exchange at any time, you simply have a little longer to fulfill the mandated timelines, unless you sell your investment property June 1, 2020. At that point, you are still within the 45-day window for identifying and/or closing on your replacement property by July 15, 2020.

Is Utilizing a 1031 Exchange Right Now a Good Idea?

If you have a high-maintenance or underperforming property on the market and/or it’s in the process of selling, it may be a good idea to re-invest the profits from the sale (and avoid capital gains tax on that profit) in a single-tenant, absolute NNN property leased to a needs-based, creditworthy tenant like Dollar General, CVS, or 7-Eleven, or a healthcare clinic, such as DaVita or Fresenius.

Companies of this nature are considered COVID-19 “essential” and many are adding tens of thousands of employees and evolving with consumer and CDC requirements. These tenants are also typically backed by investment-grade corporations more likely to ride out this tough economic time.

Presently, Westwood Net Lease Advisors are seeing these encouraging NNN investment trends:

  • Stable cap rates, typically between 5.00-7.00%. These tend to lag 6-12 months behind market fluctuations, so they have the potential to stay relatively unchanged. However, depending on how much the retail market deteriorates, we could see an increase in cap rates later this year.
  • Historically low interest rates, which can increase positive leverage, provide a higher cash-on-cash (CoC) return, and a better overall rate of return (IRR).
  • The ability to capitalize on the positive spreads between low interest rates and steady cap rates while receiving stable monthly income during this tough economic time.

To Wrap it Up – Extended 1031 Exchange  Timeline & NNNs

The NNN market shows small signs of change due to the uncertainty of COVID-19, some that work in our NNN investors’ favor, like the 1031 exchange timeline extension, and some that may not. As advisors, it is our responsibility to inform you of market changes, as well as ensuring your investment needs are met and that you understand any risks involved.

In this regard, Westwood Net Lease Advisors continue to work remotely, utilizing the latest industry technology and shared resources, and collaborating with market professionals, our team, and our clients. We know you have questions about NNN investments and opportunities – we are here to offer perspective and advice and answer any questions you may have, at no charge. Contact us today, 314-997-5227.

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