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Intermediary Fraud In 1031 Exchange
Ok so you have done everything right in getting your property through a 1031 exchange you got a mortgage, found a replacement property and all before the stipulated time is up. Nothing can go wrong now right? I’m sorry to say you may still head for a loss and still end up paying capital gains tax!
This usually happens when your funds from the first property are entrusted with an intermediary who is dishonest. It has happened several times that intermediaries have scooted with the funds leaving out nothing but capital gains tax as.
Sometimes intermediaries can get into contracts or deals which they may not be able to honor and end up with frozen accounts, which may include your money. This is pure catastrophe in 1031-exchange dealing.
1. You are unable to touch the money till your intermediary’s accounts are released.
2. The stipulated time - 180 days, allowed in finding a replacement property will be over.
3. And your 1031 exchange will be self-destruct
How does this happen? This problem arises when intermediaries hold the funds in commingled account, which is along with the intermediary's other accounts, and not separate.
In a recent case the court opinion said that when an intermediary commingles exchange funds, the commingled account becomes an asset belonging to the intermediary and not the client's
So how can you prevent such happenings?
Do extensive research on your intermediary his professional record the number of exchanges done each year and his success rates etc. Ensure that your account is held separately as for example ‘Mr. John Smith as intermediary for Ms Anne Robinson’ will suffice. This will keep your money safe in case your intermediary is struck with bankruptcy or other default charges.
Let me warn you that intermediaries on like-kind properties set for a 1031 exchange have joined hands to de-fraud people and have even taken off with money from both sides. So don't forget to do background checks on these people before entrusting your funds to them.
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