Tuesday, May 29, 2007

1031 woes

One of my friends and former colleagues agreed with me some years ago that someday, if circumstances did not change, there was going to be an S&L-like scandal involving tax-deferred exchanges under Section 1031 of the Internal Revenue Code. My opinion was that a few bad apples pushing 1031s were not selling their product to appropriate parties; e.g. pushing a tenant-in-common share of a highly leveraged, somewhat risky commercial property on a an elderly person whose life savings were tied up in this exchange. So far, thankfully, no major scandals of this ilk have surfaced on my radar screen.

But the WSJ over the weekend notes a different problem: at least two good-sized 1031 exchange accomodators (in other words, the party holding the money for up to 180 days while the person wanted a tax deferral figures out what to do) have been allegedly misappropriating funds, running Ponzi schemes or otherwise losing peoples' investments. (Again, at the risk of sounding like a lawyer, these are all allegations). I sure hope these people get their money out, and it looks like the IRS is watching over this situation and will hopefully be lenient to these taxpayers.

I remember a client asking me if I could be the exchange accomodator. Nope. That is not allowed, though I have heard rumors of situations like that occurring notwithstanding the prohibition. What would I do if I were 1031ing funds? I'd use a company that is affiliated with a bank or a title company and has significant experience with 1031s.

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