TEE-Shots Newsletter

One of the things I used to tell my clients when I had my CPA practice is you never get ripped off by people you DON’T trust. What I mean is, after a high profile fraud case, you never hear the victims say, “I just KNEW he was going to rip me off!” Instead, the victim usually says something like “I can’t believe this happened," or, "I never saw it coming...."

Recently, there has been a spate of high-profile Qualified Intermediaries, or 'QIs,' facing financial problems, including bankruptcies, lawsuits and possible federal actions.

As a result, other QIs who are reputable and have safeguards in place to protect client funds (like 1031 Exchange Experts) have been receiving calls from clients of other QIs seeking to move their funds and switch 1031 exchange companies.

So, the question arises . . . can you do this legally? Unfortunately, the answer is probably not. But keep reading; maybe you can....

Another Intermediary takes off with the money

As many of you know, we are constantly harping on the importance of keeping clients' funds in segregated accounts. Now, in the April 23 edition of Forbes Magazine, there's a yet another example of what we've been talking about.

I’m selling a property for $25,000; is it worth doing a 1031 on something this small?

Depends on the situation. The lowest exchange I can remember us doing was an $18,000 parcel. Just eighteen thousand! But some situations do call for it.

A recent Tax Court case could dramatically impact the exchange of 1) pre-construction contracts, and 2) purchase and sale contracts. In the past, it was common for taxpayers to do a 1031 exchange on a contract if their state defined that type of contract as "real estate."

YOU MAY WANT TO FORWARD THIS TO YOUR ATTORNEY...

A 1031 QI (Qualified Intermediary) serves many functions: an officially sanctioned entity to hold the proceeds of a 1031 exchange; a 'trail guide' to help you through the process; an advocate if the IRS challenges your exchange; a guardian to protect your funds while being held for the exchange.

In short, probably not. Some people do 1031 exchanges on fix-n-flips, but it's risky.

So: why are they risky? The answer has to do with INTENT. §1031 of the Internal Revenue Code specifically EXCLUDES property that is “held primarily for sale” from a 1031 exchange.

Of all the misconceptions about 1031 exchanges, this has to be the most common. We hear it from accountants, clients, attorneys, financial publications and many other sources. The frightening thing is that we even hear it from other intermediaries as well! In fact, it was even printed in a brochure of one of the largest QIs in the country!

In case you have any doubt, let us clarify: The IRS does not care what your debt is on your Old or New Property. With regard to the financial aspects of your exchange, they are primarily concerned with two things:

Can I do an exchange on a lease with more than 30 years remaining...?

Most real estate professionals are familiar with 1031 exchanges involving real estate. Common examples would include selling land and buying a rental condo, selling a commercial property and buying a vacation home, etc.

NOW may be a perfect time to do a reverse exchange...

When the real estate market is a buyer's market, it may be a great time to buy but a lousy time to sell. One of the challenges in a buyer's market is also trying to do a 1031 exchange -- because you have to both sell and buy to accomplish a like-kind exchange -- otherwise you have to pay the capital gains tax. So the very nature of a buyer's market tends to cancel out the positive effects of an exchange.