I'll be doing a 1031 exchange. I know that I am required to identify replacement properties within a 45 day window and close within 180 days on a replacement.
Am I required to choose one of the properties I identified in my 45 day window?
What if, for example, inspection finds critical issues with those three properties but I close on a different property still within the 180 days?
From the instructions for form 8824
Deferred exchanges.
A deferred exchange occurs when the property received in the exchange is received after the transfer of the property given up. For a deferred exchange to qualify as like kind, you must comply with the timing requirements for identification and receipt of replacement property. The replacement property for the exchange must be identified within 45 days after the property being given up is transferred. The replacement property must be received within 180 days, or by the due date of the tax return including extensions, whichever is earlier. See the instructions for Line 5 and Line 6, later, for more details.
And later in the same document:
Line 5.
Enter on line 5 the date of the written identification of the like-kind property you received in a deferred exchange. To comply with the 45-day written identification requirement, the following conditions must be met.
The like-kind property you receive in a deferred exchange is designated in writing as replacement property either in a document you signed or in a written agreement signed by all parties to the exchange.
The document or agreement describes the replacement property in a clear and recognizable manner. Real property should be described using a legal description, street address, or distinguishable name (for example, "Mayfair Apartment Building").
No later than 45 days after the date you transferred the property you gave up:
a. You send, fax, or hand deliver the document you signed to the person required to transfer the replacement property to you (including a disqualified person) or to another person involved in the exchange (other than a disqualified person); or
b. All parties to the exchange sign the written agreement designating the replacement property.
Generally, a disqualified person is either your agent at the time of the transaction or a person related to you. For more details, see Regulations section 1.1031(k)-1(k).
There is also something called the 3 property rule. The 3 property rule allows you to identify 1,2 or 3 places by the 45 day deadline. As long as you buy one of them you are good. That gives you more time to get the place inspected, or negotiate the final price, while maintaining options if the primary one falls through.
From the IRS 1.1031(K)–1 Treatment of Deferred Exchanges. look on page 103.
(4) Alternative and multiple properties. (i) The taxpayer may identify more than one replacement property. Regardless of the number of relinguished properties transferred by the taxpayer as part of the same deferred exchange, the maximum number of replacement properties that the taxpayer may identify is—
(A) Three properties without regard to the fair market values of the properties (the ‘‘3-property rule’’), or
(B) Any number of properties as long as their aggregate fair market value as of the end of the identification period does not exceed 200 percent of the aggregate fair market value of all the relinguished properties as of the date the relinguished properties were transferred by the taxpayer (the ‘‘200-percent rule’’).
(ii) If, as of the end of the identification period, the taxpayer has identified more properties as replacement properties than permitted by paragraph (c)(4)(i) of this section, the taxpayer is treated as if no replacement property had been identified.
