What happens if my sale falls through after I set up the exchange?

The statute hangs both periods on a transfer that never happened

Section 1031(a)(3) gives you 45 days to identify and 180 days to receive, and both are counted from the date you transfer the relinquished property. The regulation repeats the anchor: the identification period begins on the date the taxpayer transfers the relinquished property.

A closing that collapses at the table transfers nothing. You still own the property, your adjusted basis is unchanged, your depreciation schedule keeps running, and there is no exchange year to report or to disclose.

That is the opposite of the position you would be in if the closing had gone through without the intermediary in place. Once the deed records and the proceeds reach you, nothing can be rebuilt afterwards; is it too late to start a 1031 exchange covers that harder case.

Nothing is reported, because Form 8824 belongs to the year of the transfer

The Form 8824 instructions are specific about the year: if during the current tax year you transferred property to another party in a like-kind exchange, you file the form with that year's return. No transfer means no form and no disclosure.

Your return for the year is the same return you would have filed without ever calling an intermediary: rental income, depreciation, and no Schedule D or Form 4797 entry for a sale. Ask your CPA to confirm that nothing about the aborted closing needs reporting on your facts.

One practical exception is worth watching. If the title company issued a settlement statement or a 1099-S was prepared before the deal died, tell the closing agent in writing to void it, because an unwound 1099-S is far easier to fix now than in an IRS notice next spring.

Your exchange file is reopened, not restarted, but the paperwork is rewritten around the new buyer

The exchange agreement between you and the intermediary can usually stand. What cannot stand is the assignment: Reg. §1.1031(k)-1(g)(4)(v) works by assigning your rights under a specific purchase and sale agreement and notifying all parties to that agreement in writing. The agreement is gone, so the assignment attached to it is meaningless.

When the next buyer signs, the intermediary re-issues the assignment and the notice against the new contract, and the new buyer signs the notice before the deed transfers. Nothing has to be redone about your vesting, your taxpayer identification number or your closing agent unless those change.

Use the gap rather than resent it. Re-check the exchange cooperation clause in the new contract, and confirm the replacement plan, because what the QI needs to open your exchange is easier to assemble before a buyer is waiting.

Ask about the set-up fee before the file reopens, because this is contract law and not tax law

Intermediaries price their work differently, and nothing in the Code or the regulations says what happens to a fee when the closing dies. Some firms charge on document preparation, some on funding, and some credit a paid set-up fee against the same file when it closes with another buyer.

Get the answer in writing before the new contract is signed, alongside the per-property and reverse-exchange pricing; how much does a 1031 exchange cost sets out what the line items usually are.

Two related terms deserve the same treatment now: who keeps interest on funds the intermediary never received, and the notice period to terminate the agreement if you decide not to sell at all. See do I earn interest on my exchange funds.

A deposit the buyer forfeits to you is taxable this year, and probably at ordinary rates

Forfeited earnest money never touches the exchange, because there is no exchange. It is income in the year the deposit is released to you, and the rate question turns on an unusual piece of the Code.

Section 1234A converts gain from the cancellation or termination of a right or obligation into capital gain only where the underlying property 'is (or on acquisition would be) a capital asset in the hands of the taxpayer.' Rental and business real estate is carved out of the capital-asset definition by §1221(a)(2), which covers depreciable property and real property used in a trade or business.

That reading is what the courts applied in CRI-Leslie, LLC v. Commissioner, 147 T.C. No. 8 (2016), affirmed at 882 F.3d 1026 (11th Cir. 2018), where forfeited deposits on a hotel sale did not get capital treatment. Hypothetical: a buyer walks from a $900,000 contract and releases a $25,000 hard deposit to you; plan on $25,000 of ordinary income in that year and confirm the treatment with your CPA.

Keeping the replacement deal alive while you find another buyer

The risk now sits on the purchase side. Your replacement seller signed a contract expecting a closing date that just moved, and their patience, not the tax rules, is the binding constraint.

• Ask for a written extension tied to your new sale closing rather than to a fixed date, and expect to pay for it with a larger or hard deposit
• Keep the deposit refundable if the sale fails again; a hard deposit funded from your own money is money at risk with no tax relief
• If the seller will not move, price a parking structure; reverse 1031 exchanges explains what the accommodation titleholder route costs
• Re-list with the exchange already prepared, so the next contract can carry the cooperation clause from day one; can I sign a contract on the replacement before my sale closes covers the order of the two closings
• If the calendar has now pushed the sale near year end, read selling late in the year before you agree to a December closing