Dennis Norman Musings

Dennis Norman

By: Dennis Norman

I personally have only done a couple of 1031 exchanges and it has been several years since the last one, but I will admit I did not do any due diligence when selecting the qualified intermediary.    Like many people, I went with the company that was recommended to me by the title company I was doing business with.

I was in a rush to get the paper work all completed before the sale of my investment property closed so everything was handled via email and fax.  I never met the person I was dealing with at the firm nor did I do any due diligence on him or his company.  It wasn’t until after the sale closed and the (my) proceeds were given to the intermediary that it finally hit me that I was giving this company a lot of cash to “hold for me” until I found another property to purchase and that maybe I should have done a little homework first.  After all, the company I picked was just another small business like mine…it wasn’t a bank, there wasn’t FDIC insurance, or any other insurance for that matter and, as far as I know, no licensing or regulatory body overseeing people acting in that capacity in my state.

 In my case, even though I got myself a little worked up about it, everything went absolutely fine and as planned.  However, lately as stories about investors losing money as qualified intermediary’s file bankruptcy I have realized just how important it is to exercise caution when selecting one. 

At the end of last week I saw where two people in Virginia were sentenced to prison for their roles in a scheme to defraud and obtain client funds held by the firm they worked for The 1031 Tax Group LLP.  According to the Department of Justice, the 1031 Tax Group falsely represented that it would hold client funds solely to complete the clients’ 1031 exchanges.  However, after obtaining cleints’ exchange proceeds with that false promise, they misappropriated approximately $132 million in client funds to support the lavish lifestyles of the owner of 1031 TG as well as use the funds for other uses.

In light of some of these issues I have raised I think an investor should take great care in selecting a firm to act as the qualified intermediary for a 1031 exchange and perform due diligence just like you would on an investment.