If you were to exchange your investment property utilizing the benefits of IRC Section 1031, you can defer the tax on the gain, allowing reinvestment of all your equity in to one or several investment properties.
In these transactions, 1031 exchange companies (Qualified Intermediaries) are required by the IRS to hold onto the cash proceeds until investors identifies the new replacement property and closes escrow within 180 days. Since exchange companies are not regulated at both State and Federal level with the exception the State of Nevada, increasingly, there are more and more abuses committed by such companies out there.
Case in point: 1031 Tax Group of Richmond, VA., which operated in San Jose, California as 1031 Advance, file for bankruptcy in New York City in May of 2007 last year. Prior to that, it was the subject of investigations by the U.S. Postal Service and U.S. Attorney's Office in Virginia. Chapter 11 filing in the U.S. Bankruptcy Court in New York said that the 1031 exchange Tax Group owes its 20 largest unsecured creditors $68.9 million and estimated its debt from more than 300 opened exchange contracts at around $151 million.
As an individual investor, the lost could be three fold:
•1. The lost of your exchange proceeds.
•2. The tax liability as determined by the IRS.
•3. A possible law suit against you, if you are already in contract to buy a replacement property.
Therefore, here are some useful guidelines when selecting a Qualified Intermediary.
A: Stability - Does the Accommodator carry enough insurance to protect your exchange proceeds? Typically, exchange companies are required to carry D&O insurance, Fidelity Bond, and FDIC insured.
B: Knowledge and Professionalism - Can you specifically identify the individual responsible for your exchange? Larger firms may have a number of individuals in different physical locations participating in the preparation of your exchange documents - India? Will your exchange agreement pass an IRS audit in the next 3 years?
C: Relevant Experience - Does the accommodator have extensive experience in facilitating different kinds of exchange? Such as: Delayed, Reverse, Business and Constructions exchange? How many years have these practitioners been performing these exchanges? How many transactions, 50 or 5,000? Did the practitioner passed any IRS audits on these exchanges performed?
D: Tax Advice - Is the accommodator qualified to give you tax advice when you need it most? Only exchange companies with an in-house attorneys can legally advise you on your exchange.
Selecting a Qualified Intermediary:
From the simplest exchange to the most complex, we have built our reputation on expertise, financial strength, and customer satisfaction. Our company is one of the few that offers FDIC insurance on your exchange proceeds, we also operate nationally. If you have any questions, I can be reach at 925-212-1727 or email me at wlam@AdelphiRetirement.com.
Wai-Yew "Andrew" Lam, President
Adelphi Retirement Management, Inc. / www.AdelphiRetirement.com
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