S.E.C. Real Estate Observer

Thank you again for the exceptionally warm reception at the SEC marketing meeting in Louisville, KY. I finally learned how to pronounce Louisville thanks to Chris!

Kim and I have enjoyed working with some of you since then, and we look forward to working with the rest of you on your next 1031 Exchange transaction. We are always available to serve in a technical advisory capacity for 1031 Exchange, Title Holding Trust and Deferred Sales Trust™ related matters.

Exeter 1031 Exchange Services, LLC invests a significant amount of its resources to keep abreast of new developments in the 1031 Exchange industry, and in turn will communicate any important issues to you that may impact your 1031 Exchange strategies.

Here’s what’s new.

Judge Rules Against Taxpayers

I spoke briefly on this subject at the Louisville, KY marketing meeting.

You may have heard by now that the court sided against the taxpayers in the LandAmerica 1031 Exchange bankruptcy case. The judge ruled that the 1031 Exchange funds were corporate funds — not fiduciary funds — while held by LandAmerica 1031 Exchange, and as such are a part of the bankruptcy estate and therefore subject to general creditor claims.

The ruling applied to each and every LandAmerica 1031 Exchange client. It didn’t matter whether or not the clients’ 1031 Exchange funds were pooled into one common investment account or separated and held in segregated individual investment accounts. The accounts were all owned and controlled by LandAmerica 1031 Exchange and no express or implied trust account was evident.

Could Have Been Avoided

This unfortunate situation could have easily been avoided if the clients’ 1031 Exchange funds were deposited and held in either a Qualified Trust Account or Qualified Escrow Account (“Qualified Trust Account”). The Qualified Trust Account and the Qualified Escrow Account are essential the same vehicle and serve the same purpose. The only difference between the two types of accounts is that one is held and administered by a Trustee and one is held and administered by an Escrow Agent.

The court made it clear that the 1031 Exchange funds had not been set aside or held in any kind of trust or escrow account as permitted under Section 1.1031 of the Treasury Regulations. Establishing a Qualified Trust Account to hold clients’ 1031 Exchange funds would have made it clear that the funds were in fact held as fiduciary funds – not corporate funds – so that the 1031 Exchange funds would have been excluded from the bankruptcy estate.

The court’s decision in the LandAmerica 1031 Exchange bankruptcy case clearly demonstrates the crucial importance of using a Qualified Trust Account for each and every 1031 Exchange transaction.

Simply put, the Qualified Trust Account protects the clients’ 1031 Exchange funds from an unexpected (voluntary or involuntary) bankruptcy filing by the Qualified Intermediary by ensuring that the 1031 Exchange funds are treated as fiduciary funds and not as corporate funds in the bankruptcy estate.

Strong Proponent of Qualified Trust Accounts

We have always felt the only sure way to protect our clients’ interests in the event of an unplanned bankruptcy is to hold their 1031 Exchange funds in a separate Qualified Trust Account. This is because we have always expected that a court would most likely rule as the judge did in this case. We have been a strong proponent of holding clients’ 1031 Exchange funds in a Qualified Trust Account for over 24 years.

Most Qualified Intermediaries are not using a Qualified Trust Account as they feel it is unnecessary and costly. However, after the LandAmerica 1031 Exchange bankruptcy ruling, I believe that more Qualified Intermediaries will begin to implement the Qualified Trust Account. You should always ensure that clients’ 1031 Exchange funds are held in a Qualified Trust Account.

Please call me directly at (619) 615-4210 or on my mobile phone at (619) 602-9148 if you would like to discuss this issue in greater detail. Kim and I look forward to seeing you at the next SEC meeting in Albany, NY.

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