We Are Kicking Off Our Inaugural Newsletter for Tax and Legal Advisors

Dear Friends,

While our monthly newsletter, Exchanging Times, provides timely general information on 1031 like-kind exchanges, 1031 CORP. is proud to introduce the inaugural issue of our quarterly newsletter, Resource Exchange, specifically for tax and legal advisors. The Resource Exchange will provide analysis of tax cases, Revenue Rulings, exchange trends and requirements as well as other issues related to 1031 exchanges that may be helpful as you advise your clients. Just as the Exchange Team at 1031 CORP. is always a resource to you and your clients, we want this to be one more way we can help. Please let me know what you think and what you would like to see in future issues!

Kind regards,
PS: Feel free to forward this to your colleagues. To subscribe to this newsletter, click here.
CARES Act and Rev. Proc. 2022-22 Usher in Much Needed Relief - And Fixes the QIP "Glitch"
by Bruce Johnson, Capstan Tax Strategies

On Friday March 27th, the President signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) into law. This $2 trillion dollar stimulus bill will provide relief to individuals, businesses, and state and local governments, and will bolster an economy gravely shaken by the unprecedented impact of the Coronavirus.

This Act contains several provisions relevant to commercial real estate and depreciation. Most significantly, Qualified Improvement Property (QIP) will be treated as 15-year property under the Tax Cuts and Jobs Act, and therefore will be eligible to qualify for 100% bonus. This change will be retroactive to January 1st, 2018.

This long-awaited technical correction will undo the notorious "QIP glitch." TCJA architects intended for the recovery period of QIP to be 15-years. Unfortunately, in a drafting error, the new QIP was never actually put into Section 168(e)(3)(E), the subparagraph that lists assets eligible for a 15-year class life. As such, under the TCJA, QIP had to be treated as 39-year class life and was not eligible for bonus treatment. (Recall that bonus-eligible property must have a recovery period of 20-years or less.)

Drop and Swap: Substance Over Form    
The Internal Revenue Code (IRC) section
1031 requires that the 
same taxpayer who relinquished property also take ownership of replacement property in a like kind exchange. Partnerships, corporations, LLCs, and all their various structures (hereafter "structure/entity") are considered an individual "taxpayer" in the eyes of the IRC;  not the individual members, shareholders, partners, etc. (collectively "members/partners").

This can cause actual individuals who are members/partners of these structures to easily run
afoul of the IRC if they are not careful and do not fully understand this rule. In particular, some member/partners will often want out of these structures to be able to "cash out" on proceeds from the sale of the relinquished property while others wish to remain invested in real property and defer their income gain. Often, the member/partners of these structures will attempt to take ownership of the replacement property outside of the structure that was used to sell the relinquished property through shuffling of the member/partners roles and ownership. This is a risk; and could cause the Internal Revenue Service (IRS), and similar state agencies, to flag a like kind exchange for unwanted review and possible penalties.
Controversy Regarding 1031 Extensions
Extensions Outside Usual Rev. Proc. 2018-58 Relief

Those taxpayers currently engaged in a delayed or reverse 1031 exchange and struggling to complete their transaction due to the Coronavirus (COVID-19) crisis received long awaited relief from the 45-Day Identification and 180-Day Exchange Period deadlines in Notice 2020-23  released on April 9th. The notice provides that any person performing a time-sensitive action listed in either ยง 301.7508A-1(c)(1)(iv) of the Procedure and Administrative Regulations or Revenue Procedure 2018-58, 2018-50 IRB 990 (December 10, 2018), which is due to be performed on or after April 1, 2020, and before July 15, 2020 (Specified Time-Sensitive Action), is an Affected Taxpayer. For purposes of this notice, the term Specified Time-Sensitive Action also includes an investment at the election of a taxpayer due to be made during the 180-day period described in section 1400Z-2(a)(1)(A) of the Code. This includes the 45-Day Identification and 180-Day Exchange Period deadlines in a 1031 delayed or reverse exchange.

This type of extension is vastly different than the 120 day extension usually allowed under Section 17 of Revenue Procedure 2018-58 for federally declared disasters, such as hurricanes, wildfires and terrorist attacks. Section 17 provides 120 days or the date specified in the disaster notice which is posted on the IRS website. The extra time would be beneficial due to the challenges faced with the Stay at Home Orders and many parties to the real estate transaction being deemed non-essential workers and unable to work. We are seeing lenders pulling previously approved financing, buyers walking away from the agreement and the inability to complete appraisals. Some advisors believe Section 17 of Rev. Proc. 2018-58 automatically applies if the taxpayer is affected by the disaster.

On April 14th, Jennifer Auchterlonie, special counsel to the IRS associate chief counsel (procedure and administration) spoke on a webinar for the ABA Section of Taxation and noted there have been many questions regarding the 1031 extensions. She stated IRS is working on FAQs explaining the extension relief. Nothing has been released as of April 23rd.

On April 20 th , a letter signed by 19 real estate related associations, including the Federation of Exchange Accommodators (FEA), was sent to Treasury Secretary Mnuchin requesting the application of Section 17 of Rev. Proc. 2018-58 for all taxpayers completing a like-kind exchange. The letter also asks for the effective date to be  retroactive back to March 13 th when President Trump signed the Stafford Act declaration. This is also when many states issued their Stay at Home orders. 1031 CORP.'s Collegeville office is located in Montgomery County, the first Pennsylvania county to be "shutdown" effective March 13 th .
1031 CORP. will advise if further guidance is released. Information will be posted on our website and social media channels immediately.

Absent further IRS guidance, any taxpayer with a 45-Day Identification Period or 180-Day Exchange Period deadline between April 1 and July 15, 2020 will have an automatic extension to July 15th.

1031 Exchange Reporting Guide
To assist with the preparation of your client's Form 8824 to report their like-kind exchange, download our 1031 Exchange Reporting Guide. Your client should have received a packet containing all of their pertinent exchange documents once their transaction was complete as well as an exchange proceeds account summary. They should also have a Form 1099-INT reporting their interest earnings.

1031 CORP. is your 1031 Resource
The 1031 CORP. Exchange Team is your like-kind exchange resource, from sharing section 1031 related news to facilitating your client's 1031 exchange to answering your questions.

About 1031 CORP.
Serving as a nationwide qualified intermediary for 1031 like-kind exchanges since 1991, 1031 CORP. strives to provide an exceptional exchange experience for our clients and their professional advisors. We provide enhanced security of funds, knowledgeable and experience exchange professionals and a commitment to keep the exchange process seamless and worry-free. We also offer reverse and improvement exchange services through our affiliate, Reverse 1031 CORP. For additional information, visit www.1031CORP.com.

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