Exchanger STILL Beware: QI faces multiple charges...

CBS4 News in Denver, CO, reported Friday on the indictment of a Qualified Intermediary who conspired with two others to bilk investors out of millions of dollars in an elaborate real estate investing scam. He is charged with 11 counts of securities fraud and 12 counts of theft. He had been previously convicted of other felonies.

So how did this QI get qualified? Quite simply, the 1031 exchange industry is completely unregulated. Anyone can print business cards and call himself a "Qualified Intermediary."

The IRS defines a "Qualified Intermediary" as "...anyone who is NOT DISqualified..." Unfortunately, being a convicted felon does not disqualify you. Nor does a lack of education. To-date, there is no certification process to be recognized as a QI. Anyone can call himself a "Qualified Intermediary."

In a previous tax court case where 1031 investors lost their property due to the incompetence of a 1031 QI, the judge simply told the plaintiffs, "Caveat Exchanger," or "Exchanger Beware." In other words, anyone doing a 1031 exchange is responsible to find out if their 1031 QI is reputable.

One thing you can do to protect yourself is ask questions: is your QI verifiably bonded or insured? Does the QI have attorneys and CPAs on staff? Will the QI let you see your money online while they are holding it for you? Will your money be held in a separate account? Be careful about this one: one QI told a client his money was held in a separate account. What he meant was his company's operating funds were separate from all his client's commingled funds. This will not protect you if he or one of his other clients are doing something illegal with their money. The court still could freeze the entire account--even while your money is still in it! Once your money is in the hands of a crooked QI, there is nothing you can legally do to protect your funds.

So remember -- Exchanger Beware!

--The Experts

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