There is a very specific timeline that the IRS lays out for your exchange calendar that must be followed to the letter. From the day that you close the sale of your investment property, it is important to know that there are two periods for you to respect: the identification period and the exchange period.
1. 45-Day Identification Period
The 45-day identification period is the time in which an exchanger must either identify potential replacement properties or take title to their new property and finish the process. However, at the minimum, one must have a list that shows the properties that are being considered for purchase. On day 46, the list is finalized and cannot be changed. Whatever is on that list is there for the remainder of the exchange period. Make every effort not only to get into contract during the 45-day period but also to close and purchase a replacement property or properties.
2. 180-Day Exchange Period
Concurrently, with the 45-day period is the total exchange period of 180 days. From the day that you close the sale of your property, you have 180 days to complete the process. The purchase has to be one or more of the properties that are on your 45-day list. If you start your exchange in such a way that you’re going to run up against your tax return deadline prior to the 180 days, file an extension and you’ll still get the full 180 days for your exchange period.
While these strict timelines might seem intimidating, there is no need to worry. There is no penalty for starting and not finishing a 1031 exchange. If you start a 1031 exchange but do not complete it because of a 45-day issue, or any other reason, simply do not report the exchange on the next tax return. Let the time periods motivate, rather than intimidate you.