IRS Provides Additional Guidance for Real Estate Businesses
April 14, 2020
On April 9 and April 10, 2020, the IRS issued two releases of importance to real estate businesses in the aftermath of the CARES Act – one impacting IRC Sec. 1031 “like-kind” exchanges and qualified opportunity funds (“QOFs”) (Notice 2020-23) and the other addressing the business interest deduction limitation under IRC Sec. 163(j) (Revenue Procedure 2020-22).
Additional Help for IRC Sec. 1031 Exchanges and QOFs -- Notice 2020-23
Notice 2020-23 provides taxpayers an extension to July 15, 2020 to perform certain “Specified Time-Sensitive Acts” that are due to be performed on or after April 1, 2020 and before July 15, 2020. Among those specified time-sensitive acts are time periods involved in IRC Sec. 1031 exchanges and in investments in QOFs.
IRC Sec. 1031 Exchanges
If the 45-day identification period or the 180-day exchange period ends between April 1, 2020 and July 15, 2020, the deadline is automatically extended to July 15, 2020. For the 180-day exchange period, the taxpayer has until the July 15, 2020 date assuming the due date of the return (including extensions) for the year in which the transfer of the relinquished property occurs is not before July 15, 2020. The Notice does not provide relief if a deadline was prior to April 1, 2020.
Observation: While this relief provision ends on July 15, 2020, provisions contained in Revenue Procedure 2018-58 specifically addressing IRC Sec. 1031 exchanges include additional relief which, if applicable, could extend the deadlines for certain transactions beyond July 15; however, it is not clear whether Notice 2020-23 allows that additional relief.
Qualified Opportunity Funds
The 180-day investment period to invest gains into a QOF is also extended by Notice 2020-23. Taxpayers electing to invest gains into a QOF within a 180-day period which would have ended between April 1, 2020 and July 15, 2020, will now have until July 15, 2020 to invest in a QOF and elect to defer the eligible gain.
Business Interest Limitation -- Revenue Procedure 2020-22
Under the CARES Act, the business interest limitation was changed for 2019 and 2020 to 50% of adjusted taxable income (“ATI”). Also, a technical correction to the 2017 Tax Cuts and Jobs Act (“TCJA”) provision regarding qualified improvement property (“QIP”) retroactively changed QIP to 15-year property. The overall impact of these changes may cause some taxpayers to rethink their decision to elect (or not elect) the real estate business election under IRC Sec. 163(j)(7). Taxpayers that would not have had a business interest limitation using the revised 50% of ATI limitation or that had significant QIP will definitely want to weigh their options.
The Revenue Procedure gives guidance on how to make a late IRC Sec. 163(j)(7) election or withdraw a previously made election by timely filing, with an election or election withdrawal statement, an amended federal income tax return, amended Form 1065, or an administrative adjustment request (“AAR”) under the centralized partnership audit regime, as applicable.
All of the above options must be filed on or before October 15, 2021 (but in no event later than the date provided under the applicable statute of limitations) and must include any adjustments to taxable income for the election or withdrawal of the election and any collateral adjustments to taxable income or to tax liability. A taxpayer either making a late election, or withdrawing a previously made election, must re-determine its depreciation for the property affected by the change in election status in accordance with IRC Sec. 168.
In addition, Revenue Procedure 2020-22 clarifies the time and manner in which certain taxpayers can make elections under the amendments to IRC Sec. 163(j) made by the CARES Act. The taxpayer can –
- Elect out of the 50% ATI limitation for tax years beginning in 2019 and 2020;
- Elect to use the taxpayer’s ATI for tax years beginning in 2019 to calculate the taxpayer’s IRC Sec. 163(j) limitation for tax year 2020, subject to modification for short taxable years; and
- Elect out of deducting 50% of excess business interest expense (“EBIE”) for tax years beginning in 2020 without limitation.
It should be noted that a partnership can make the election out of the 50% ATI limitation for tax year 2020 only. The CARES Act provides that partnerships cannot use the increased 50% ATI limitation for a 2019 tax year. No formal statement is required for any of the three above options. The election is made by either using the 30% ATI limitation, applying the 2019 ATI on the 2020 federal income tax return, or not applying the 50% EBIE rule in determining the IRC Sec. 163(j) limitation. These elections may also be withdrawn by filing a timely filed amended federal income tax return, amended Form 1065, or AAR, as applicable.
EisnerAmper will continue to keep you up to date on relevant new developments regarding the tax implications of the coronavirus pandemic.