MBA, Trade Groups Ask Treasury to Delay Like Kind Exchange Deadlines

The Mortgage Bankers Association and other industry trade groups this week asked the Treasury Department and the Internal Revenue Service to delay deadlines applicable to like-kind exchanges currently underway to ensure liquidity in real estate markets during the coronavirus pandemic.

“We believe that the deadlines to identify replacement property and/or complete like kind exchanges should be extended for 120 days or to the last day of the general disaster extension period authorized by an IRS News Release or other guidance, similar to  the relief described in section 17 of Rev. Proc. 2018-58 and authorized under Internal Revenue Code 7508A,” the letter said.

Like-kind exchanges support the real estate sector by encouraging investors of all sizes, including small businesses and individuals, to remain invested in real estate while still allowing them to balance their investments to shift resources to more productive properties, change geographic location or diversify or consolidate holdings–for example, a taxpayer who has entered into an Exchange Agreement with a Qualified Intermediary or an Exchange Accommodation Titleholding Agreement with an Exchange Accommodation Titleholder.

Like-kind exchange rules encourage investors to remain invested in real estate by allowing property owners to defer capital gains tax if, instead of selling their property, they exchange it for another comparable property. As long as the taxpayer remains invested in real estate, tax on any gain is deferred. When the taxpayer ultimately sells the asset, the capital gains tax is paid. 

The letter noted the coronavirus crisis is threatening the ability of real estate investors to complete like kind exchange. Under the most common type of like-kind exchange, a taxpayer sells a relinquished property and deposits the proceeds with a Qualified Intermediary. The taxpayer subsequently has 45 days to identify replacement property and 180 days to complete a transaction. Failure to meet the strict deadlines for identifying trade properties and then actually closing on a replacement property result in immediate recognition of capital gain income that could otherwise be deferred.

“Unfortunately, current circumstances make compliance with like-kind exchange reinvestment rules impossible,” the letter said. “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 letter noted taxpayers who may have commenced an exchange will be unable to identify a replacement like-kind exchange property and/or close on a transaction even if such a property can be identified. “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,” it said. “The funds they would have to utilize to meet such tax obligations would only further reduce liquidity in real estate markets.”

Joining MBA in the letter: the National Multifamily Housing Council; National Apartment Association; Alternative & Direct Investment Securities Association; American Land Title Association; American Resort Development Association; American Seniors Housing Association; Asian American Hotel Owners Association; CRE Finance Council; Federation of Exchange Accommodators; Institute for Portfolio Alternatives; International Council of Shopping Centers; NAIOP, the Commercial Real Estate Development Association; NARIET; the National Association of Home Builders; the National Association of Realtors; the CCIM Institute; the Institute of Real Estate Management; Realtors Land Institute; and The Real Estate Roundtable.

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