Some of the nation’s most powerful real estate groups have written to Treasury Secretary Steven T. Mnuchin urging him to temporarily lift restrictions on 1031 exchanges.
The groups — led by the National Multifamily Housing Council – are calling on the IRS to extend the current deadline for a 1031 deal from 45 to 120 days.
The 1031 allows an investor to defer paying capital gains taxes on an investment property when it is sold as long another “like-kind property” is purchased with the profit gained by the sale of the first property.
The deal must be signed with 45 days and closed within 180 to apply.
The IRS has the authority to extend the deadlines in cases of federally declared disasters, but it has yet to make any announcement on the issue.
In their letter, the real estate groups say the deadlines to identify replacement properties should be extended to 120 days during a pandemic that has shut down the real estate investment market across much of the country.
“The COVID-19 crisis is threatening the ability of real estate investors to complete like-kind exchanges … and make compliance with like-kind exchange reinvestment rules impossible,” say the groups in their letter.
“Identifying properties for trade purposes requires travel and a confidence in both the expected cash-flow stream and the value of potentially acquired property. Closing on an identified property requires these same conditions plus extensive due diligence by the buyer, lender, and other third-party contractors.
“All of these necessary steps are currently unfeasible due to travel restrictions, quarantine, properties being locked down, and office closures of title / escrow companies and governmental recording offices.”
The groups say many investors could be held liable for their taxes because they haven’t been able to find a replacement property.
“Taxpayers, many of whom are small and medium-sized businesses and middle-class investors, should not have to be concerned about the possibility of having to pay significant capital gains taxes because like-kind exchange transactions cannot be completed due to the disruption caused by the coronavirus pandemic,” says the letter.
“The funds they would have to utilize to meet such tax obligations would only further reduce liquidity in real estate markets.”
Among the groups co-signing the letter are the National Apartment Association, Associated General Contractors of America, Building Owners and Managers Association (BOMA) International, CRE Finance Council, International Council of Shopping Centers, Mortgage Bankers Association, NAIOP, Nareit, IREM and The Real Estate Roundtable.
Some of the city’s investment sales brokers say it is vital the IRS acts quickly to stop further bleeding within the sector, which is already hamstrung by broken loan agreements and cashflow hurdles.
David Eyzenberg, president of the real estate investment bank Eyzenberg & Company, said, “The proposed amendment is nice but doesn’t address the real current issue. A larger concern is those buyers that have already identified properties and were scheduled to close but can’t because their financing blew up and/or there were significant changes to the asset cashflow.
“It will take time to either arrange new financing, wait for the CMBS market to truly come back (maybe mid may) or restructure the purchase contract to deal with current reality.”
“When the real estate market has ground to a halt, it is unfair to pressure investors to put their money into an asset that they can’t see, can’t visit or can’t access given the devastating impact this disease and the resultant impact may have on property values moving forward,” said Adelaide Polsinelli, vice chair at Compass real estate.
“I would hope Secretary Mnuchin takes quick action to prevent possibly thousands of investors being forced into a situation that could ultimately hurt them.”