1031 Exchange Companies Close, FBI Investigates

Southwest 1031 Exchange Accommodators (qualified intermediary) of Nevada closed their offices 30 January while retaining a millions of investor's money. Nevada is the only state which has any type of registration requirement for exchange accommodators, and it requires only a $50,000 surety bond.

According to a court filing, at least 75 customers had money with the company. The losses could exceed $83 million. One group of real estate investors alone has $22 million on the line.  Clients started to become suspicious when their exchange funds were not being wire transfered for their replacement property purchases. Clients attempted to call and were given excuses which eventually led to the calls not being answered at all. Eventually one client went to the business to find the doors locked.

There are no regulations for how deposited funds should be held in a 1031 Exchange. With the exception of Nevada requiring Qualified Intermediaries (QI)to be registered and bonded, no other state have any regulation at all for QI's. The only real qualification for a QI is they cannot be dis-qualified. A dis-qualified person is the taxpayer, a relative of the taxpayer, or someone (such as an accountant or attorney) who has acted as an agent of the taxpayer in the past two years.

Think about that for a second. Technically, you could give your 1031 exchange proceeds to your neighbor to hold and that would be perfectly legal. You could have your grocer hold the money. How about the newspaper delivery person? Yep, they are qualified. Scary. Very Scary.

Anyway, the court has appointed a receiver to try to make heads or tails out of this mess. Millions and millions of dollars are at stake. People's financial futures are in jeopardy.

Learn more about 1031 exchange here.

I've posted ways to protect yourself in a 1031 exchange here.