The recent closure of Southwest 1031 Exchange and its affiliates, Arrow 1031 Exchange and Qualified Exchange Services (QES), raises an interesting question; if the IRS requires you to follow its rules, should the IRS be responsible the regulation of said rules?
An Arrow 1031 victim contacted me. He lives in Texas and used Arrow 1031 Exchange for his 1031 because he contacted the IRS and was told he must use a qualified intermediary to complete his 1031 exchange. He searched the Internet and made a few calls and selected Arrow 1031 Exchange as his qualified intermediary because Nevada requires Qualified Intermediaries (QI's) to be registered, they had a good website and the staff was friendly.
I'll be the first to admit a good website is huge. I've been conducting business online since the early 90's when the Internet was text based and I'm a sucker for a good website. A friendly and helpful staff is also huge. The Nevada registration would also have sealed the deal for me.
In hindsight we now know the registration meant very little, if anything. We already know a good website and friendly people means little when it comes to trust and money.
I've been a cheerleader for 1031 Exchanges for years. I believe in the concept and the benefits. I have always been extremely frustrated by the lack of educational requirements on those involved. The lack of regulation for Qualified Intermediaries (QI) has always concerned me and I've frequently warned clients about who they are trusting with their money. But it never occurred to me that the IRS has to take some responsibility in this. The IRS requires the use of a QI. I would guess that the average investor assumes the IRS must regulate the QI industry if it requires the use of a QI to complete a 1031 Exchange.
If the government decided to build a bridge across the Grand Canyon and made that the only way to get from one side to the other, it is reasonable to expect the bridge to provide safe passage? Basically the IRS has built a rope bridge with the Qualified Intermediary requirement but they failed to ensure the bridge was safe or to even provide a safety net.
There is a Federation for Exchange Accommodators the regulates education and ethics within the industry. I, personally, am a Certified Exchange Specialist. Although the requirements are not those of a Laywer or CPA they are not laughable. You have to pass a test given by the federation covering many areas of tax and real estate law as well as accounting. In order to take the test there are experience and backround requirements.
Any person interested in doing a 1031 exchange should make sure that their facilitator is a member of the BBB, FEA and that they have a CES on staff along with bonding and E&O insurance and find out who the owners are. It is in no way more safe to use a QI that is owned by a large, multi billion dollor parent company than to use an independent company. Independent companies are more likely to give you better service and have a more highly educated staff with longevity than some large company with high turnover and high school drop outs answering the phone.
Bottom line ASK QUESTIONS - If you don't like the answers chances are you shouldn't use that company.
Posted by: Melanie | May 17, 2007 at 05:58 PM
I almost laught at Melanie's ignorant comments. It is oblivious that she is pushing for privately own Exchange Companies. Haven't we learn already that "Privately owned" doesn't have the financial backing as a Title Company owned Exchange Company? Even as important Title owned do NOT withdraw funds for high risk investments. Never!! Ask the questions. Financial strength? and how do you back it?
How is the money held? Who owns the company? etc
Posted by: MAlexandra | May 30, 2007 at 08:02 AM