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Archive for July, 2008
Before delving into the risks of a 1031 exchange, it is important to define at a very high level what a 1031 is. A 1031 exchange allows individuals who sell an investment property to use the proceeds from the sale to invest in another “like” property. The 1031 exchange allows property owners to defer their capital gains tax liability. The purchase of a like kind property must occur within 180 days.
Although the definition above sounds simple there are a number of considerations to keep in mind before engaging in a 1031 transaction. Ensure that you fully understand the rules associated with this type of exchange. Details can be found at www.irs.gov. One requirement of all 1031 exchanges is that an intermediary be used. Once a property is sold, money is placed with this intermediary until a like kind property can be located and closed on. Intermediaries are unregulated and the funds held by them are not FDIC insured like a traditional deposit at a bank. As a result a number of bad apples have crept into the intermediary business. A Denver Post article reports that in the past year “Three hundred and thirty investors nationwide including 80 in Colorado, lost 132 million when qualified intermediaries absconded with their money.”
As I’ve mentioned in several articles on our Hard Money Commercial Lending Resources Page, there are a number of items that brokers/borrowers need to be mindful of before engaging in a commercial lending transaction. The number one tip is: Be wary of large upfront fees. A recent article in the Wall Street Journal further highlighted this advice. The article titled: U.S., States probe real estate loan broker (www.wsj.com 6/25/08 p:A3) discusses how “the advance fee plan has cost borrowers millions”. This article highlights an all too common problem within the commercial lending arena.
Two firms are being probed by the FBI and SEC (Bluestone Capital and Remington Financial Group). The California department of corporations is also investigating Landbridge equity. These firms are accused of taking large upfront fees with the intention of “not seriously pursuing financing”. Unfortunately a substantial number of borrowers have likely lost millions as a result of the “advance fee” plan that these three companies have utilized.