One of the 350 Victims of Ed Okun’s Bankrupt 1031 Exchange Tax Group Speaks Out:”The Most Compelling Case Yet for Action to Be Taken!”

In what is easily, the most compelling and worrisome story to strike since 1031 Tax Group empire came crashing down, a victim of this fiasco has shed some light on the terrible situation at hand.

Elizabeth Callanan, one of 350 victims of 1031 Tax Group empire, sent the following email in response to my article on “1031 Exchange Due Diligence: Is Bigger Better When Choosing Your Qualified Intermediary?.” I found her story and information extremely important; I hope other victims of this type of heart ache will stand up and be heard, use this information to their benefit, and report back here in order to keep the flow of information on-going.

“Elizabeth H. Callanan | | IP:

  1. As one of the 350 victims of Mr. Edward H. Okun and the bankruptcy of his 1031 Tax Group, I’ve been reading articles on 1031’s posted here and elsewhere closely. For the record, we did our “due diligence” on Security 1031 Services, LLC (one of the “roll up” 1031’s Mr. Okun had quietly acquired in the two years leading up to this bankruptcy. I say “quietly” because his acquisition of the long term, well known, reputable 1031’s across the country was not at all evident to those who regularly used their services (since he kept all their management teams, including the former owners, in place), nor was his eventual insistence that they transfer their exchange funds (actually held by them in separate accounts identified by each exchanger) into a comingled account from which he then liberally “borrowed” for his own purposes. Security 1031 Services was recommended to me by my real estate attorney as a reputable company with which he had done multiple transactions over the years with no problems (several in the months just prior to the bankruptcy). Security 1031 Services was a member, apparently in good standing, of the FEA (I visited their website as well). I’m not at all sure what that membership or FEA “certification” actually implies, since their only response seems to have been to quickly delete the names of the bankrupt affiliates from their website and otherwise disavow them. It regularly taught 1031 seminars to real estate groups and law schools (which I found on those websites not on Security 1031 Services’ website). It had a fidelity bond for $10 million (the relevance of which is questionable since I had no way of knowing the size of the outstanding exchanges held by Security 1031 Services that bond was intended to cover, but it also seems Mr. Okun must be charged with fraud or other criminal activity in order for them pay off, and in a bankruptcy case, they pay the “estate” whose resources may get distributed first to everyone BUT those of us whose exchange funds constitute the 1031 Tax Group’s only apparent assets. (In truth the 1031 Tax Group’s only “assets” appear to be a pile of worthless unsecured IOU’s for $135 million.) As to advice posted here that the exchangers each insist that their signatures be required to make any transfers to ensure “control” of the exchange funds, my attorney and a close reading of the IRS 1031 regulations would that this would nullify the exchange since the IRS specifically requires the exchanger to surrender all such “control.” When the IRS issued its 1031 regulations requiring that taxpayers surrender control of their sales proceeds to a “Qualified Intermediary,” an industry those regulations created, they should have prescribed as well the oversight responsibility and regulations governing that industry. Their continuing failure to do so has left at least 350 of us reeling and probably put a stake in the heart of the 1031 exchange industry since, despite protests from various 1031 Qualified Intermediaries on this website and elsewhere, there doesn’t appear to be any certain way of guaranteeing the security of those funds.Jun 16, 10:36 AM” — [ Edit | Delete | Unapprove | Approve | Spam ] — 1031 Exchange Due Diligence: Is Bigger Better When Choosing Your Qualified Intermediary?

17 thoughts on “One of the 350 Victims of Ed Okun’s Bankrupt 1031 Exchange Tax Group Speaks Out:”The Most Compelling Case Yet for Action to Be Taken!”

  1. A sad and compelling story but one to learn from.

    The comment that dual signatory power will jeopardize and exchange is not correct and I refer you to Revenue Procedure No. 2003-39 where such a system was approved.

    That concern is a myth that many QIs want to continue, and is much like earning interest on the funds held. Some QIs still tell customers that they, not the customer, must get the interest when nothing could be further from the truth. There is NO reason today why you should not get 100% of ALL interest earned on your funds.

    The real lesson here is to make sure that your legal, tax and real estate advisors are exchange experts. Not merely ones that occasionally get involved in exchanges but ones that handle exchanges day in and day out.

    Also, never rely solely upon information given you by a QI, but check it out with these exchange experts first. Check and double check before making any move.

  2. Rob,

    Again thank you for adding more information for readers to seriously consider. I too am finding it a sad and tough situation for the many victims who are suffering through this ordeal.

    On one of your points, interest earned, I am getting conflicting feedback. I have a contact within one of the “established” or big intermediaries who is unwilling to go on record. His take on interest earned is that the QI should be allowed to keep this income stream due to the tiny margins involved and the work processed in a 1031 transaction.

    I agree that is smart business to get multiple opinions when performing due diligence on a QI.

    Thanks for the tips and please continue to contribute as we are trying to bring as much information forward as possible!


  3. What he is actually saying is that he does not want his customers to actually know what they are is being charged for his company’s service.

    If the “margins” are too small, their stated (read disclosed) fees need to be increased.

    The problem with keeping interest is that the true cost of the transaction is not made clear to the customer. All costs need to be completely transparent.

    I have been in this business longer than nearly anyone (I am certain that it is longer than your anonymous friend) and I have always passed 100% of the interest through to my customers and always had all of my fees clearly understood by them in advance.

    QIs need to understand and acknowledge that their principal focus and goal must be meeting the needs and security concerns of their customers, while charging a reasonable yet clearly understood and disclosed fee for that.

    Until that business model is adopted by all QIs we will continue to have the kind of problems we are now experiencing.

  4. Q.I.’s charge a fee for their services. Further, the money doesn’t belong to the QI, the interest therefore belongs to the Exchanger. Same as escrow or trust accounts.

    Re the Edward Okun, et al fiasco, my attorney, yes I’m one of his victims, told me the national organization of Q.I.’s are lobbying to extend the identification period because of what’s happened. I had two properties slated to close May 1st, my identification period ended April 27th, and I now have no idea where my money is.

    As the law stands now, everyone will still be responsible for the captial gains taxes even if our money is never recovered, and if it is for those of us whose identification period is closed I’ll have to pay capital gains on the full amount. How messed up is that? No money received in my pocket, but by golly I’ll have to pay the taxes.

  5. Rob,

    I thank you for the frank and direct answers to the questions I have had regarding interest payments.

    I would like to challenge anyone associated with a big well established QI to refute or substantiate Rob’s claims. Please step to the plate and tell your side of the story.

    Until then Rob remains the “expert” lone source of information, not anonymously presented, willing to come to the table. Where are all the major QI reps?

  6. To Darlin’ June 23 12:36 AM

    The IRS has previously rejected such requests for extension before (of the ID Period and the Exchange Period) and will likely reject them again now.

    Also, while it may be possible to complete your exchange with another QI, (we are doing that for some exchangers caught in the Southwest/QES failures) unfortunately there is no authority for changing QIs in the middle of an exchange.

    On the tax issue, while you may later recover your funds (and I hope you do) if you do not, you will then have a deductible loss but unfortunately it will not offset the previous gain from the failed exchange because it will likely occur in a future tax year.

    All the more reason to insist on some sort of joint control of your funds and not rely upon bonds, insurance or even the financial size and strength of the QI entity.

  7. There are some issues that have not been discussed and I am going to do it.

    First of all one should seriously ask, “Exactly why do I want to do a 1031?” Right now capital gains taxes are very low and this is an ideal time to cash out; the future may be not so good in this respect.

    Second. The whole design of the 1031 mechanism is to keep money in the real estate game. But think – you are selling high. Does the 1031 seduce you, telling you that you will save money on taxes, seduce you into BUYING HIGH? If so you are selling high, buying high and probably buying a higher priced property. This is dumb.

    So, although you never hear anyone say “Just don’t do the 1031”, now you have.

  8. Mike

    Your comments are good ones but even in a soft market it is very possible to improve your real estate holdings and often achieve a better return than would be possible if taxes were paid out of proceeds diminishing what would be available for alternate investments.

    Also you cannot overlook the “angel of death” that still exists with a step up in basis at your death. This law remains in flux, but is likely to survive, actually giving older taxpayers more incentive to exchange.

    Exchanging remains the only area where allowing Uncle Sam to be your partner on a replacement property can make sense.

  9. Having just finished a 1031 exchange using WaMu 1031 Exchange as QI, I thought you might find it interesting to hear about their model. They give you the option to receive interest or not, with fees being higher if you choose the interest option ($300/leg vs. $200/leg). That seems like a fairly rational and transparent model.

  10. Dennis,

    That is good news for once. Maybe you could give us more info about how and what Washington Mutual did in their performance that has made you feel safe and happy?


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  14. All of these tics are set up to make the brokers, sponsors and banks a lot of money in up front fees and management fees. They are, in no way, designed to help investors protect their money or make money on their money. We got into a tic in houston that was and is 100% occupied, yet, the sponsor has so gutted the project that there has not been a distribution since march. Investors anticipate a cash call. Ironically, this project was losing money six months into the project. A fact which the sponsors kept from the investors by deferring their payments until this year, at which time, they paid themselves in full from the deferred payments. How I wish I had listened to my friend and not trusted that the government controls these things. It is the wild west in tic land. SEC and FiNRA couldn’t care less about the thousands and thousands of people who have lost their life savings. Another legacy of George and his de-regulation for the good of his cronies.

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