In theory, one great way to postpone paying taxes on the sale of investment property is to buy and sell through a 1031 Exchange, but there are some time restrictions and everything has to be done through a third-party intermediary. So what happens when that third-party goes bust? Clients of LandAmerica are now finding out. From a Wall Street Journal story:
The collapse of title-insurance company LandAmerica Financial Group Inc. has left hundreds of real-estate investors scrambling to recover money in what was supposed to be a short-term and low-risk arrangement.
The investors, from retirees to a public company, had $400 million on deposit with the LandAmerica subsidiary to take advantage of a real-estate strategy known as a 1031 exchange. A 1031 exchange, named for a section of the U.S. tax code, lets investors delay capital-gains taxes on the proceeds from recently sold property, as long as the investor lets a third party hold the funds. They must reinvest the money in a new property within six months...
The episode is another troubling chapter in the 1031 exchange industry. Earlier this year, a federal grand jury in Virginia indicted Edward Okun, operator of 1031 Tax Group, for allegedly plundering $132 million of client money as a "qualified intermediary," the same role played by LandAmerica. Mr. Okun pleaded not guilty. His trial is set for 2009.
Separately, DBSI Inc., a Boise, Idaho, facilitator of tenant-in-common investments that take advantage of 1031 exchanges, filed for bankruptcy in November, plunging 8,500 investors into a legal morass.
In a 1031 exchange, the seller of a property funnels proceeds into an account held by a "qualified intermediary," an entity that holds on to the money in an escrow-like account for as long as 180 days while the seller finds a new property in which to invest. If successful, the investor defers capital-gains taxes on the sale. (The Federal Trade Commission rejected a petition in August 2008 to regulate qualified intermediaries. Only two states, Nevada and California, require qualified intermediaries to meet certain standards.)
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