2007 has been a tumultuous time for the 1031 industry. With the assumed embezzlement of funds by McGhan’s Southwest Exchange ($100 million), Ed Okun’s 1031 Tax Group ($150 million), and the “Where’s Waldo” disappearing act attorney Scoop Daniels ($1 million) performed-the industry is suffering from a severe credibility problem amongst consumers.
One sane voice of reason amongst the forest of doubt is Gary Gorman founding partner 1031 Exchange Experts, LLC based in Colorado. In one of the best articles to date on the future of 1031 exchanges “The Future of the 1031 Exchange Industry”, Gorman briefly outlines his thoughts and predictions for the industry.
Gorman’s pedigree is impeccable. He has over 35 years of real estate experience. Gorman is a CPA with over 10 years of Big 6 accounting experience under his belt. Gorman was a Tax Manager at Price Waterhouse & Company as well as one of their leading instructors of taxation. He also taught taxation classes at the University of Oregon at Corvalis. In addition he has written numerous books on 1031 exchanges with “Exchanging Up” being recommended by the National Association of Realtors.
The following is an excerpt from Gorman’s article “The Future of the 1031 Exchange Industry.” This excerpt gives Gorman’s analysis of how the industry will look in Colorado. Much of this may very well apply to California and other states due to new state laws, like Nevada’s SB 476, and legislation currently on the docket under review. My thoughts are inbetween in blue.
“So looking into my crystal ball, this is what the intermediary industry will look like in Colorado in a couple of years: intermediaries will be regulated by the Colorado banking commission. We’ll have to be license, which will require a background check and proof of competency. We’ll have to keep each exchange account in a segregated account, which will require two signatures, and the account holding Colorado exchange funds will have to be in a Colorado financial institution. Fidelity and errors and omissions insurance will be required.
The key ideas are that each exchange account will be kept in a “segregated” account requiring two signatures; and I believe that the other key to regulatory compliance is a requirement that the 1031 exchange funds must remain in a banking institution located in the state in which the exchange is being executed.
The end result is that most, if not all, small “mom-and-pop” type intermediaries will disappear; even some of those owned by title companies. Costs for intermediaries will sky rocket and revenue will shrink which means that fees will increase dramatically and your choices of intermediaries will diminish as well (you won’t be able to shop around for lower fees).
If the comments I have been receiving are forthright, many have admitted (off line) that their desire to “save a few bucks” led them to chose QI’s with less than complete resumes or experience. Regardless of the fact that fewer choices will be available, the key is that consumer monies become guaranteed safe from embezzlement. Even if investors are forced to pay substantially more fees, isn’t it worth saving the capital gains taxes without enduring the possibility of financial ruin?
On the plus side, the intermediaries that survive will do so providing a superior level of service and the technical level of intermediary work will increase accordingly. And best of all, your money will finally be safe.
This final thought is right on the money: “. . . your money will finally be safe.”