1031 Tax Deferred Exchanges are wonderful when they work,
but we've just learned of a financial disaster and believe
everyone needs to take note.
Simply put, a 1031 Tax
Deferred Exchange is a mechanism whereby a real estate
investor can roll over the cost basis from one
investment property to another and defer paying capital
gains taxes until the last property is sold and cashed
out. In a transaction, a third party "qualified
intermediary" ("QI") holds the funds from a sale until a
new purchase is made following strict IRS guidelines. The
QI then pays out the funds for the purchase and receives a
fee for their services. The problem is, the industry of
exchanging is not regulated, and here's what happened to
clients of
The B&B Team.
They sold their inn. Proceeds of sale went to a
qualified intermediary per the rules. They had 45 days to
designate new investments and 180 days to settle. After 45
days they hadn't found a property to buy, so they asked
for their funds back, only to discover that there was no
money! "It seems that he [the QI] invested client funds in
Lehman Brothers auction rate securities probably as long
as a year ago. When that market froze, he started funding
exchanges with new client money (otherwise known as a
Ponzi scheme). By the time we were to be funded, there
wasn't any cash left."
This is an unmitigated disaster for these folks, and
apparently there are a number of exchange companies
recently that have filed for bankruptcy, so others have
been hurt by similar schemes and problems. But don't throw
out the baby with the bath water. There is a solution to
protect yourself.
Our client goes on to say, "If someone wants to do a
1031, they need to make sure that the agreement states
that their funds are to be kept segregated in an account
in their name (very important) and that they specify how
the funds are to be invested. In addition, they need to
make sure they get copies of the bank statements. If the
amount is more than FDIC covers, they might want a surety
bond for the difference." To support this, our client adds
that "The only one getting their money back so far is
someone who did the above. The court ordered an immediate
release of their funds."
In a time of greed and uncertainty, there seems to be
no shortage of unscrupulous people. But bad behavior
doesn't make a system wrong. It's people who are flawed,
and people who can learn lessons. We hope you'll make note
of this warning and advice about 1031 exchanges, so you
can both take advantage of the great tax benefits inherent
in them and protect your assets in the process.
Peter
