A Warning to Those Who Use 1031 Exchanges

Investors using 1031 exchanges to defer capital-gains taxes on an investment property they have sold can run into trouble if the Internal Revenue Service-required qualified intermediary, known as a QI, has financial trouble.
By: Peter Lattman and Kemba Dunham: REALTOR® Magazine Online
IRS regulations say that investors can’t touch the money from the sale of an investment property and must use a QI to manage the money while their search for a “like kind” property to invest in. The IRS doesn’t place restrictions on where the money is invested.

In the past year, at least two independent QIs have allegedly misappropriated client funds. In one case, businessman Donald McGhan is accused of operating a Ponzi scheme with money in his care — he lost more than $95 million of customer proceeds. The 1031 Tax Group has filed for bankruptcy protection after its principals lost $151 million through bad investments and loans.

The Federation of Exchange Accommodators, the qualified intermediaries' industry-trade group, says it has been working with states and the federal government to enhance oversight of the industry.