In this 1031 FAQ video, Jeff Peterson talks about how to keep your 1031 exchange funds safe and secure. Watch more 1031 educational videos here.
Alright so you're going to do a 1031 exchange. You're going to sell your relinquished property, and your proceeds are going to get wired out into the interwebs. Who knows where your money is going and who knows how safe and secure your exchange funds are?
There's been a couple of cases where 1031 intermediaries have goofed up.
In one case that came out of Minnesota, a taxpayer’s monies were used by the intermediary to invest in Internet stocks. The internet stocks bubbled and the intermediary didn't have the cash to pay back for the purchase of the replacement property.
In a much larger case called Land America Exchange – a huge national 1031 exchange company had invested the funds allegedly in securities that became illiquid and when it came time for people to complete their exchanges they weren't able to access their funds to acquire the replacement properties.
So this begs the question: how can I know if my money is safe?
The best way to make sure that your money is safe is to never ever allow your funds to be co-mingled with anyone else’s funds. When you set up a 1031 exchange you need to make sure that you have a separate segregated bank escrow account. You need to know what that account number is and you need to know that that account is only going to be used for your funds. It's not co-mingled with the operating account of the intermediary, and it’s not commingled with any other money.
If you have your money separately segregated you know exactly where it is during the entire process - that's great.
But wouldn’t it be great if you could lock down that money in a dual-signature account? The first signature required to release any funds would be the intermediary’s, because they’re the holder of the account. But the second co-authorization could be the taxpayers for whom we’re doing the exchange.
So we want to get a co-written authorization from the taxpayer to make sure that it’s proper and appropriate to transfer out these funds to make sure they're returning them to the taxpayer of the exchange or for the purchase of the replacement property.
- 1031 Hotline: If you have questions about keeping your exchange funds secure, feel free to call me at 612-643-1031.
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