COVID-19 continues to upend professional and personal lives, and the real estate industry has received one of the harshest economic hits. As a result, industry professionals have had to make adjustments in order to complete complex processes like 1031 exchanges.
What Is a 1031 Exchange?
In short, a 1031 exchange — also known as a like-kind exchange — is a process that allows a seller to defer paying capital gains tax on a sale. The seller does this by investing the entire sale amount into the purchase of another property. Basically, it’s when one property is swapped for another of like-kind. 1031 exchanges can also involve co-ops.
Why Choose a 1031 Exchange?
The main benefit of a 1031 exchange, as opposed to simply selling one property and buying another, is the tax deferral. Essentially, the money that would have otherwise been put toward taxes can now be reinvested into the new replacement property.
Additionally, the 1031 exchange also allows real estate investors to more freely shift the focus of their investments and projects — while avoiding the need to pay a significant amount in taxes.
Simply put, it encourages sellers to buy again and keep buying — and that keeps the market moving for everyone. In this way, investors can diversify their portfolios with a different type of property or properties, or choose an investment property that’s easier to manage.
1031 Exchanges Under COVID-19
Like the real estate industry as a whole, 1031 exchanges have also been affected during the pandemic. For instance, under typical conditions there are two deadlines to keep in mind during the 1031 exchange:
- 45 days from the date you sell your property to identify a potential replacement property or properties
- 180 days from the date you sell your property to purchase your replacement property or properties
While the Internal Revenue Service (IRS) does not usually grant extensions on these deadlines, it has made an exception due to COVID-19. Specifically, the IRS has extended the 45-day identification period and the 180-day exchange period for exchangers whose deadlines were due on or after April 1, 2020. Likewise, the deadlines for those exchangers to identify a replacement property and/or acquire replacement property has been extended to July 15, 2020.
However, if the exchange period ended before April 1, 2020, there is no retroactive effect, which may end up hurting many investors.
For more legal updates related to COVID-19, such as closings and notaries, check out our last article, “Buying a Home in NYC During Lockdown: Virtual Closings & Escrow Closings.”