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"Exchanger
Beware...!"
The Perils of Commingled
Exchange Accounts
Section
1031 of the IRC allows you to
defer the capital gains tax upon
the sale of qualified real estate
and/or personal property used
for business, but one of the requirements
of doing an exchange is that the
exchanger/investor must use a
Qualified Intermediary
or QI.
So, how do you find a good QI...?
After a recent court case (91
AFTR 2d 2003-1850) there is now
an obvious criteria. Most QIs
place their clients' money in
a commingled, escrow-type account.
This can be disastrous: if something
goes awry with the QI's company,
your exchange could fail and your
money will be at serious risk.
In the case cited above, the QI
was day-trading with their clients'
exchange proceeds, and they eventually
had to file for bankruptcy.
The courts ruled that because
the exchange proceeds were in
a commingled account, they were
a "bankruptcy asset"
– and available for the
creditors of the bankruptcy proceedings.
So all of the clients' proceeds
were used to satisfy the creditors
– including those clients
who had already taken their money
out within the last 90 days to
purchase their replacement property!
They had to give their money back
to the courts and creditors!
The
1031 Solution: make sure
the Intermediary uses separate
or segregated
accounts for their clients' proceeds.
Something else to note: the QI
industry is unregulated. So what
can you do to protect your money
during the exchange? Be a wise
and informed consumer: get referrals
or references about an Intermediary
from real estate professionals,
such as Realtors, accountants,
attorneys, etc. Secondly, make
sure your QI is both bonded and
insured.
And most importantly, insist that
your escrowed funds be held in
a separate or segregated
account. Remember, in the words
of that bankruptcy court, "...caveat
exchanger!" or Exchanger
Beware!
--The
Experts
TEE-Shots
are Tips
from the Exchange
Experts
that are designed to make you think about, and ask questions about, the 1031 exchange process.
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