Please take into consideration when reading this that 1031 exchanges have been proven to be a wonderful way to handle investment property and that this article should not be used to classify all 1031 Exchange companies. I am providing this article to inform you that you should be cautious whenever dealing with any type of company that holds money for you.
This article was in the REALTOR(r) magazine online
Investors using 1031 exchanges to defer capital-gains taxes on an investment property they have sold can run into trouble if the Internal Revenue Service-required qualified intermediary, known as a QI, has financial trouble.
IRS regulations say that investors can’t touch the money from the sale of an investment property and must use a QI to manage the money while their search for a “like kind” property to invest in. The IRS doesn’t place restrictions on where the money is invested.
In the past year, at least two independent QIs have allegedly misappropriated client funds. In one case, businessman Donald McGhan is accused of operating a Ponzi scheme with money in his care — he lost more than $95 million of customer proceeds. The 1031 Tax Group has filed for bankruptcy protection after its principals lost $151 million through bad investments and loans.
The Federation of Exchange Accommodators, the qualified intermediaries' industry-trade group, says it has been working with states and the federal government to enhance oversight of the industry.
Source: The Wall Street Journal, Peter Lattman and Kemba Dunham (05/26/07)