Common Pitfalls with Identifying Replacement Properties/Canceling Exchanges

Learn about the key deadlines and rules for modifying property lists in 1031 exchanges, and what happens if you miss them.

When executing a forward/delayed 1031 exchange there are 2 major deadlines:  (1) exchanger has 45 days to identify to the qualified intermediary replacement properties, and (2) 180 days to close on at least one property that was identified previously and is on the list in (1) above.  Both deadlines begin on the day the taxpayer closes on the property they are selling (the relinquished property).

But sometimes things do not go according to plan and an exchanger wants to change the identified properties, in order to close on a property that is not on the original list.  Is this allowed?  Some common questions are addressed below.

• Can I change the identification notice?
  • The regulations are silent on whether an exchanger can modify the list once submitted, but it is clear under the IRS code that to successfully complete a 1031 exchange the property purchased must have been on the list provided in writing and that list must be submitted by the 45^th Here at e1031xchange we provide you with an identification form to be completed, signed and returned.  Modifications to the form are considered superseding and replace prior versions so long as they are received by the 45^th day deadline.
• What if I cannot identify a property within the 45-day period?
  • If you cannot identify a replacement property, then the 1031 exchange fails. If this happens, we return the funds less our fee and the taxpayer is responsible for the tax liability from the sale. There is no penalty, however, for not completing a 1031 exchange by failing to identify, and the taxpayer proceeds as though no exchange were attempted (and accounts for gains and depreciation recapture on applicable tax returns).  Not identifying a replacement property is considered a closing event which terminates the 1031 exchange.
• Are there extensions to deadlines?
  • There are virtually no extensions to either the 45 or 180 day deadlines. The few permitted are in the code, such as natural disasters in a region that the IRS later issues a notice concerning. As extensions are rarely given, a taxpayer should not rely on receiving one.
• Can I cancel my 1031 exchange and get an immediate return of my money?
  • Not every deal works out and you may find yourself in a situation where you need to cancel your 1031 exchange and use your funds in a different manner. Cancellations of 1031 exchanges do occur, but certain protocols must be followed. Under the IRS code, a 1031 exchange can only be terminated once a closing event occurs.  There are three closing events:
  • The exchanger does not identify a property within 45 days: This automatically terminates the exchange and funds held by the qualified intermediary are returned promptly.  Once the exchanger identifies properties on or before the 45^th day, it is not possible to return the exchange proceeds until one of the following two closing events occurs.
  • The exchanger closes on all identified properties: Once all properties on the identification list close and it is past the 45 day period, the exchange ends and any remaining funds are returned promptly.
  • The 180 day deadline is reached: Assuming neither of the above closing events occur, then on the expiration of the 180^th day deadline the exchange ends, and any funds remaining are returned.

We encourage you to review our other relevant articles and to ask as many questions as you can at the beginning of your exchange so you can avoid bumps along the way in your journey to complete your 1031 exchange.

Written by Jerry Feeney and Daniel Mendoza