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COVID-19: A Major Disaster for Ohio Real Estate Developers and Investors

Extended Deadlines

Kaitlin L. Hoop and Gary M. Harden
4/8/20

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4/10/2020 UPDATE:  Since this article was published, IRS has taken the anticipated action to extend the 45-day identification period and 180 day exchange period deadlines until July 15, 2020, for time-sensitive actions to be performed on or after April 1, 2020, and before July 15, 2020.  Notice 2020-23 was released on April 9, 2020.

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   On March 31, 2020, President Donald J. Trump declared that a “Major Disaster” exists in the State of Ohio and ordered federal assistance to supplement state and local recovery efforts in the areas affected by the Coronavirus Disease 2019 (COVID-19) pandemic. It seems in the era of COVID-19, we start our day with these ominous headlines—Emergency, Major Disaster. But what do these terms mean legally and what affect might the declaration have on Ohio’s commercial real estate market?

What is a Disaster Declaration?

   At the request of a state governor, a “disaster declaration” is a label granted by the president to individual states that are overwhelmed by a disaster or emergency and require federal assistance.[1]  Once declared, disaster declaration enables public officials to exercise emergency powers to preserve life, property and public health. The president may determine that the state qualifies for either: (1) an Emergency Declaration or (2) a Major Disaster Declaration.[2]

Emergency Declaration

   The president may declare an emergency whenever the president determines federal assistance is required to supplement state and local efforts to protect lives, property, public health, safety or reduce the threat of a United States catastrophe.  An Emergency Declaration generally is requested when the state requires short-term federal assistance in responding to an emergency or otherwise the state’s needs do not rise to the level of Major Disaster Declaration.[3]   Unless approved by Congress, the total amount of assistance provided for in a single emergency may not exceed $5 million.[4]

Major Disaster Declaration

   Major Disaster Declarations are reserved for the most severe, catastrophic circumstances and therefore avail a state governor to a wider array of federal disaster response and recovery programs for individuals and public infrastructure.[5]  The procedures for obtaining a major disaster declaration are addressed in the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. §§ 5121-5206 (Stafford Act), which provides, “Such a request shall be based on a finding that the disaster is of such severity and magnitude that effective response is beyond the capabilities of the State and the affected local governments and that Federal assistance is necessary.”[6]  As part of the request, the governor must direct execution of the state’s emergency plan, furnish information on state and local response resources, provide an estimate of the damage and the impact on the private and public sector, and provide an estimate of the type and amount of assistance needed under the Stafford Act.[7] On April 7, 2020, Governor DeWine and Lieutenant Governor Husted created the Ohio Office of Small Business Relief in order to administer this federal and related state aid throughout Ohio, in cooperation with the Ohio Small Business Development Centers and Minority Business Assistance Centers at local levels.

   Accordingly, governors across the U.S. are requesting their states be declared federal disaster areas amid the COVID-19 pandemic. As of the date of this writing, approximately half of the states have been declared major disaster areas.[8]

What Does the Major Disaster Declaration Mean for Ohio Real Estate Developers/Investors?

Opportunity Zones – Extension of Two Deadlines[9]

   The Major Disaster Declaration will extend two deadlines regarding investments in qualified opportunity zones. First, those qualified opportunity zone businesses operating under a working capital safe harbor plan can extend the 31-month deadline for spending cash or other financial assets held by a qualified opportunity zone for 24 additional months.[10] Second, an opportunity fund that receives capital or proceeds from the sale of qualified property typically has 12 months to reinvest such funds before they are to be included in the fund’s 90% asset test. However, if the fund’s ability to reinvest is delayed by a federally declared disaster, this deadline can be extended for an additional 12 months.[11]

1031 Like-Kind Exchange – Extension Likely

   Taxpayers may defer gain on real property acquired through a 1031 “like-kind” exchange. The IRS sets strict deadlines for this type of exchange, and many real estate investors are concerned about meeting them because of the COVID-19 pandemic. From the closing date on a relinquished property, typical 1031 exchange deadlines provide the taxpayer with 45 days to identify, and 180 days to acquire, a replacement property. However, through news releases and guidance over the past few years, the IRS has granted an extension of those deadlines as a result of some federally declared disasters such as hurricanes and wildfires.

   Pursuant to Section 17 of Revenue Procedure 2018-58, like-kind exchange deadlines that fall on or after the date of a federally declared disaster may be postponed by 120 days or until the last day of the extension period specified in the IRS guidance allowing postponement, whichever is later. Taxpayers seeking extensions must fall under the definition of an “affected taxpayer” as provided in the IRS guidance and must have difficulty meeting the 45- or 180-day deadline due to the federally declared disaster. In addition, the relinquished property must have been transferred on or before the date of the federally declared disaster. However, the postponement period may not extend beyond one year or the due date of the taxpayer’s tax return for the year of the transfer.

   Despite President Trump’s major disaster declaration for the State of Ohio on March 31, 2020, the IRS as yet to announce whether such declarations are sufficient for a 1031 extension.

   Should you have any questions regarding deadlines associated with opportunity zones, please contact either  Ms. Hoop or Mr. Harden.

   Anna L. Crisp, a law clerk with Eastman & Smith who is finishing her third year at The Ohio State University Moritz College of Law, contributed to this article.

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Disclaimers:

At the date of publication the above information was correct.  It is quite possible the information above has changed as COVID-19 is a rapidly evolving situation. 

The article in this publication has been prepared by Eastman & Smith Ltd. for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.

[1] 42 U.S.C.A. § 5170.

[2] 44 C.F.R. § 206.38

[3] 44 C.F.R. § 206.35

[4] https://www.fema.gov/disaster-declaration-process

[5] See Id.

[6] Id.

[7] See Id.

[8] https://www.hudexchange.info/news/new-fema-major-disaster-declarations/

[9] https://www.jdsupra.com/legalnews/opportunity-zone-deadlines-extended-by-65227/

[10] US Treasury Dept Final Regulations on Opportunity Zones: Frequently Asked Questions, 12/19/2019, p.3; Preamble to Final Regulations Treas Reg §§1.1400Z2(a)-1, 1.1400Z2(b)-1, 1.1400Z2(c)-1, 1.1400Z2(d)-1, .1400Z2(d)-2, 1.1400Z2(f)-1, 1.1502-14Z, and 1.1504-3, p. 244; Treas Reg §1.1400Z2(d)-1(d)(5)(iv)(C).

[11] §1.1400Z2(f)-1(b)(2)