So Your 1031 Exchange Deadline Has Been Extended? Why Waiting Until the July Deadline Could Be a Bad Idea

Please view our story on National Real Estate Investor here.

With so many exchanges facing the same deadline, there is very real potential for unintended consequences.

As a result of the COVID-19 pandemic the IRS issued Notice 2020-23, which provided a multitude of tax extensions, including 1031 like-kind exchange deadlines for some investors.

While the extensions were provided for good reason, there may be unintended consequences if eligible investors all wait to pull the trigger on their exchanges near or at the time of the deadline. Here’s a look at how that could happen.

The typical investor in a 1031 exchange has 45 days from the sale date of the original property to identify a replacement property, and 180 days from the sale date to complete the purchase of a replacement property. With the IRS’s new notice, the 45-day and the 180-day deadlines have been extended until July 15, 2020 for investors who originally had their 4th day or their 180th day fall between April 1, 2020 and July 15, 2020.

One example of how this could affect someone in a 1031 exchange would be if they had sold their property on April 3, 2020, in which case their 45th day would have been May 18, 2020. (They would have had to formally identify their replacement property by then.) Under the new guidelines, the same investor would have until July 15, 2020 to identify a replacement property.

More time is generally good, but if too many investors wait to effect their exchanges, the odds of unintended consequence are high. The possible outcomes? One may be that demand for quality exchangeable investment real estate exceeds the available supply in the first two weeks of July. If this happens, investors face fierce competition over replacement properties and could end up overpaying for choice assets.

Notably, many localities have seen a significant drop in real estate listings since the outbreak of COVID-19, so the supply of available replacement properties is below normal.

Another consequence is that if an investor waits to purchase a replacement property, the investor may not have enough time to complete their transaction. I don’t think we have ever had a time in America where so many 1031 exchangers had the same deadline date.

A good option for many 1031 exchange investors facing deadline pressure may be co-investment products such as DSTs (Delaware Statutory Trusts) because the financing and due diligence are already in place by the sponsor and it’s possible to complete a purchase in three to five business days typically. So clearly, tight market or not, there are now highly viable investment options for 1031 replacement property buyers.

Bottom line, many 1031 exchange investors are rightly taking a reevaluation of the marketplace in the midst of the COVID-19 pandemic, but with so many 1031 exchangers in America facing the exact same deadline on July 15, there is very real potential for unintended consequences.

Alex Madden serves as vice president of Kay Properties and Investments, which operates a 1031 exchange property marketplace.

About Kay Properties and

Kay Properties is a national Delaware Statutory Trust (DST) investment firm. The platform provides access to the marketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, full due diligence and vetting on each DST (typically 20-40 DSTs) and a DST secondary market.  Kay Properties team members collectively have over 150 years of real estate experience, are licensed in all 50 states, and have participated in over $30 Billion of DST 1031 investments.

This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please read the entire Memorandum paying special attention to the risk section prior investing.  IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation.  There are material risks associated with investing in real estate securities including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning/operating commercial and multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed.

Nothing contained on this website constitutes tax, legal, insurance or investment advice, nor does it constitute a solicitation or an offer to buy or sell any security or other financial instrument. Securities offered through FNEX Capital, member FINRASIPC.

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