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Where Has All the Money Gone?

By Jennifer Steck

Real Estate Agent with Rocky Mountain Homescapes, Keller Williams, Denver Colorado

May 20, 2007 03:34 AM

Many Colorado real estate investors attempting to defer paying capital gains taxes using the "1031 Exchange" program may have lost millions. From large corporations to small individual investors, this crisis will impact a lot of people.

The first in the Colorado saga was the disappearance of Breckenridge attorney, Royal "Scoop" Daniel. Daniel was serving as the 1031 exchange intermediary for a number of clients. It is estimated that he left town owing around $1M to clients who had entrusted him with proceeds from their real estate transactions. There is some speculation that he fled to Brazil. A warrant for his arrest has been issued for suspicion of felony theft.

Then last week, the 1031 Tax Group entrusted with over $100M in exchange funds, filed bankruptcy. One of the top ten creditors is located in Littleton with $1.9 million. It is estimated that between 200-999 people or companies will be negatively impacted. Investors around the country will be impacted, especially those in Texas. Eight of the top twenty creditors are in the South Texas area.

How this will impact the program and each of the investors is yet to be determined. But it will have an immediate impact on Realtors and investors who will do extensive research in identifying future intermediaries.

The 1031 Exchange program refers to a section of the Tax Code that allows real estate investors to sell property for another like-kind real estate investment. The money is required to be held by a third party intermediary until another property is purchased. Many investors take advantage of the program so that they can defer paying capital gains taxes until they actually sell a property and keep the proceeds.

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Don Horn, ABR, CRS, GRI, CNE

Keller Williams Realty - Goodyear, AZ

I use Transnation 1031 Exchange Services.

I don't want my clients to incur any risk in this process. I am surprised that someone would use a local attorney in this type of transaction.

May 20, 2007 03:38 AM

Patty Anaya

Reliable Realty Service - Citrus Heights, CA

Broker / Owner, Reliable Realty Service | GRI, e-P

I'm new to the business, but I heard that QI's have no oversight or license requirements (meaning no criminal background check). Is this true? If so, extensive research is probably a very good idea!

May 20, 2007 01:54 PM

Jennifer Steck

Rocky Mountain Homescapes, Keller Williams, Denver Colorado - Denver, CO

Denver Real Estate

Don- There are definitely credible companies out there. I know of a few myself, but it doesn't hurt to do a little more research.

Patty- My understanding is that this is a non-regulated industry. I wouldn't be surprised if we see some changes. They are long overdue.

May 20, 2007 02:06 PM

Anonymous

Jeff Johnston

The industry is indeed unregulated and it seems that changes are being discussed in DC now to add some oversite. A major problem comes from the fact that the QI "owns" the money during an exchange, the taxpayer must relinquish all control and benefits of the money to qualify under the tax code. These firms in the news were likely using the client funds to invest in other ventures and using new exchanges to fund current clients. The problem came with the market downturn and a decrease in the number of new exchanges coming in to fund purchases for existing clients. Research should be done whenver doing business with a new company, as always, but the vast majority of 1031 companies are ethical business people.

May 22, 2007 03:02 AM

Jeff, Thanks for all the great information. I didn't realize that clients relinquished all control. I'm curious to see how this impacts the industry. There are a lot of great companies out there. It is a shame that a few have really hurt people with their unethical practices.

May 22, 2007 10:50 AM

Joanne Hanson

Coldwell Banker Colorado Rockies Real Estate - Frisco, CO

Summit County, Colorado Realtor

Hi Jennifer,

I just ran across this post. I had written one the week prior, called "You too, can use your E & O Insurance", and although I didn't name him at the time, it was about my experience with Scoop Daniel. It is amazing that someone can take advantage of a community the way it appears he did. People were really feeling betrayed when he disappeared. I have since heard that a friend of his had lent him about $200,000, in the form of a mortgage on his home. Apparently Scoop never recorded the deed of trust, which he said he would do, then sold the house without telling the friend, who is now out $200,000! Some friend! There was another guy who found out early on that his 1031 funds were not available, and Scoop told him what he had done and promised to pay him back out of other people's funds as they came in. The guy never told anyone about it as he was afraid if he did, he wouldn't get his money back at all. He got all but a few thousand back before Scoop disappeared.

Jun 30, 2007 11:07 AM

Joanne- That is so tragic when you think you know someone so well and he turns out to be a criminal. I can't imagine losing tens of thousands of dollars that I've worked so hard to save. I hope Scoop Davis gets caught. While people will never see their money again, at least he will have to face some kind of justice.

Jun 30, 2007 02:57 PM

Andrew Lietzow

IaREIA | Iowa Landlord Association - Des Moines, IA

MBA-Exec Dir Iowa Real Estate Investors Association -

What a lot of people don't know is that the trust department of a bank can serve as a QI. The ins and outs of the 1031 can be handled by a 1031 exchange expert, but the money can be held by the bank.

Very sad that people get so absorbed by greed. Jeepers, this Scoop Davis had to have had a pretty decent business going with the fees being charged. I wouldn't be a bit surprised if he turns up dead someplace in a third world country. People with that kind of money being lost can do more than just get angry, they can get even. Of course, that's breaking the law and I certainly don't advocate it, but I wouldn't ever think of stealing a rich man's money -- it could be hazardous to your health! Jeepers that is dumb.

Jun 30, 2007 03:11 PM

Andrew- I wasn't aware that banks could do this. That is great information to have.

I'm sure his life has changed drastically for the worst. It had to have a severe impact on him to cheat and fool everyone in his community. He was well respected before all of this information came out. That loss will cost him one way or another. It is dumb.

Jul 01, 2007 02:01 AM

Bill Exeter

Exeter 1031 Exchange Services, LLC - San Diego, CA

1031 Tax-Deferred Exchange Expert

I have been in the 1031 exchange qualified industry for 24 years now and was one of the founding members of the Federation of Exchange Accommodators. Here is a link to an article that I wrote on Choosing a SAFE 1031 Exchange Qualified Intermediary. I would be happy to answer any questions regarding the selection of your qualified intermediary even if you are not using our service.

Mar 08, 2008 12:17 PM

Where Has All the Money Gone?

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