Unraveling the Mystery of 1031 Exchanges - Part II | Go Ahead, ASK! Podcast Ep. 04

1031 Tax Deferred Exchange transactions are often very complex and can be extremely confusing to an investor that has never completed a 1031 Exchange before.  The Exeter Group demystifies what qualifies and what doesn’t on the Go Ahead, ASK! Podcast.  

We started Unraveling the Mystery of 1031 Exchanges during our very first Go Ahead, ASK Podcast - Part I (Ep. 01).  We continue this discussion on Episode 04 of Go Ahead, ASK! by The Exeter Group includes how to choose a Qualified Intermediary, what qualifies for tax-deferred exchange treatment under Section 1031, why Qualified Trust Accounts are so very important, and what properties are considered like-kind to other properties. Join us now....

Go Ahead, ASK! Podcast by The Exeter Group.  Unraveling the Mystery of 1031 Exchanges - Part II.

1031 Exchange Qualified Intermediaries (Accommodators) Are Not Created Equal

Taxpayers often think 1031 Exchange Qualified Intermediaries are all created the exact same – but Qualified Intermediaries are absolutely not created equal – and the differences can be significant and crucial.  Were you aware that there is absolutely no regulatory body or government agency oversight available for Qualified Intermediaries, and that only about one percent of Qualified Intermediaries are licensed, regulated, audited and have minimum equity capital requirements?  That is very scary when you think about how much client funds they are holding for taxpayers' 1031 Exchange transactions.  

I have seen many 1031 Exchange Qualified Intermediaries go under over my 35 year career in the 1031 Exchange industry and most of those could have been avoided had there been any kind of regulatory or governmental oversight and audit of those Qualified Intermediaries. 

Qualified Intermediaries are an extremely crucial part of any successful 1031 Exchange transaction.  They have three (3) very important responsibilities, which include preparing the 1031 Exchange agreements and documents to properly structure the taxpayer's 1031 Exchange, working with the taxpayer and their advisors to ensure a successful 1031 Exchange transaction and probably the most important responsibility – hold, protect and safeguard taxpayers' 1031 Exchange funds. 

Taxpayers should be diligent when evaluating and selecting a Qualified Intermediary since they hold significant amounts of 1031 Exchange funds. 

Governmental Regulatory Oversight Ensures Safety and Soundness 

Government oversight by a regulatory body, such as the State Division of Banking, State Department of Financial Institutions, Office of the Comptroller of the Currency (OCC) or the Federal Reserve, will ensure that the 1031 Exchange Qualified Intermediary is operating in a safe, sound and secure manner.  This is very important since they have such tremendous fiduciary responsibilities.  The vast majority of Qualified Intermediary failures could have been prevented through this governmental oversight and audit. 

Qualified Trust Accounts Protect Investors’ Funds 

Qualified Intermediaries should deposit, hold and safeguard taxpayers' 1031 Exchange funds in separate, segregated Qualified Trust Accounts or Qualified Escrow Accounts.  The court ruled in the LandAmerica 1031 Exchange bankruptcy case that the 1031 Exchange funds held by LandAmerica 1031 Exchange were corporate (not client) funds and were subject to the creditor claims in the bankruptcy since the monies were not held in Qualified Escrow Accounts as authorized by the Department of the Treasury Regulations.  Qualified Escrow Accounts clearly delineate 1031 Exchange funds as fiduciary (client) funds and not corporate funds in the event the 1031 Exchange Qualified Intermediary files for either voluntary or involuntary bankruptcy. 

Exeter Trust Company

Exeter 1031 Exchange Services, LLC deposits, holds and safeguards its clients' 1031 Exchange funds in separate, segregated Qualified Trust Accounts at Exeter Trust Company.  Exeter Trust Company is licensed, regulated, and audited by the Wyoming Division of Banking.  It is required to maintain significant levels of equity capital.  

Bonding, Insurance and Equity Capital Provide Financial Strength and Stability

1031 Exchange Qualified Intermediaries’ should provide substantial levels of fidelity bond coverage, errors and omissions insurance coverage, fiduciary insurance coverage and maintain substantial equity capital as an added and appropriate safety net for errors or losses in a 1031 Exchange transaction.  Taxpayers should always evaluate the methods and processes put in place by the Qualified Intermediary to track, monitor and protect 1031 Exchange funds through internal controls, checks and balances. 

There is Absolutely NO Substitute for Experience 

Taxpayers need more than just a 1031 Exchange transaction processor.  Taxpayers should be able to go to a 1031 Exchange Qualified Intermediary for advice and guidance on the absolute best practices in the administration of 1031 Exchange transactions.  Interview the Qualified Intermediaries that you are looking at to ensure the administrators have the technical depth, experience and expertise necessary for the administration of 1031 Exchange transactions.  Taxpayers need assistance, so the 1031 Exchange Qualified Intermediary should be willing to work with the investor and their legal and tax advisors to ensure a successful 1031 Exchange transaction. 

Exeter 1031 Exchange Services, LLC Expands Executive Management Team

Anton "Tony" Hammock joins Exeter 1031 Exchange Services, LLC

Anton "Tony" Hammock joined the executive management team of The Exeter Group, LLC and its affiliated companies, including Exeter 1031 Exchange Services, LLC, Exeter Reverse 1031 Exchange Services, LLC and Exeter IRA Services, LLC, and their affiliated companies as Senior Vice President, Chief Trust Officer, and Trust Operations Manager.

Exeter 1031 Exchange to Open Mountain Regional Office in Cheyenne, Wyoming 

Tony Hammock will be responsible

Tony Hammock

for locating suitable office space and then opening our new Mountain Regional Office to be located in Cheyenne, Wyoming.  The new Mountain Regional Office will serve as a new regional office for our 1031 Exchange Services Group and our new Trust Operations Department.

He will manage and oversee the day-to-day trust department operations, banking, funds transfers and cash management activities and develop our long-term strategic plans for our Trust Operations Department.

Mr. Hammock will be joined by Patrick Bailon who will relocate from our National Corporate Headquarters Office to our new Mountain Regional Office in Cheyenne, Wyoming.  Patrick will continue to administer 1031 Exchanges as part of the 1031 Exchange Services Group, but will also help with the company's expansion into trust services.  

What is a Qualified Intermediary?

Need to quickly learn what a Qualified Intermediary is and what role they play in a 1031 Tax Deferred Exchange? Welcome to the next episode of Exeter Tax Deferred Solutions' White Board Videos, which will help you learn the 1031 Exchange basics quickly. View the entire series of The Exeter Edge White Board Videos.

IRS Rules On Failed 1031 Exchange Transactions When 1031 Exchange QI Fails

Revenue Procedure 2010-14 was issued today by the Internal Revenue Service to help investors that were affected by 1031 Exchange Qualified Intermediaries that failed to complete the investor's Like Kind Exchange by acquiring and transferring replacement property to the investor.

The Rev. Proc. 2010-14 provides a safe harbor method of treating and reporting capital gain or loss for certain taxpayers who initiate tax deferred exchanges under Section 1031 of the Internal Revenue Code but fail (default) to complete their 1031 Exchange because their Qualified Intermediary has failed to acquire and transfer like kind replacement property to the investor.

The Internal Revenue Service will not treat investors that meet the requirements of Rev. Proc. 2010-14 as being in actual or constructive receipt of their 1031 Exchange funds when the investor did not complete his or her 1031 Exchange because of their Qualified Intermediary (QI) defaults and becomes subject to a bankruptcy or receivership proceeding.

Recent Concerns Re: Choosing A 1031 Exchange Qualified Intermediary

There has been much written by the press recently regarding the selection of a qualified intermediary for your 1031 exchange transaction. The focus of the media has been on two (2) recent problems with qualified intermediaries. They do not fully explain that the two problem QI's were acquired by problem individuals over the last two (2) years. These two individuals acquired the 1031 exchange companies specifically to use client 1031 exchange funds to finance other operations and they got caught. It is unfortunate that two (2) individuals have cause so much harm to innocent parties for the rest of the solid 1031 exchange companies operating in the industry.

I thought that it would be a good time to revist what to look for when evaluating and selecting your qualified intermediary.

The 1031 exchange Qualified Intermediary (often referred to in the real estate industry as an Accommodator or Facilitator) is a crucial part of any successful 1031 exchange transaction. You should therefore exercise significant care when choosing your own Qualified Intermediary because of the critical role it will play in administering your 1031 exchange transaction.

The purpose of this article is to assist you, as a potential Exchangor, in developing an understanding of the risks involved in selecting your Qualified Intermediary and the questions to ask as part of your due diligence. The due diligence process should not be taken lightly.