Taxation & Estate Planning

Help for 1031 Exchange Customers

By Darrin Mish

Customers of 1031 Exchange companies that go bankrupt may now be seeing some light at the end of a tunnel. A 1031 Exchange company is one named for the Internal Revenue Service code 1031 that holds money from the sale of property while the seller looks for a replacement property to invest in. If the search is successful and the sale is concluded within 180 days, the seller does not have to pay property gains tax. But if not, then he is liable for tax on the sale of his property.

The problem arises when the exchange companies is declared bankrupt, in which case the proceeds from the seller's sale is tied up in the exchange company and does not pass on to him. Thus when the seller is obligated to pay property gains tax on his sale, he has to fork out the money from his own pocket instead of the proceeds from the sale which he never received.

This predicament has prompted various parties to take action to resolve the issue. The IRS is working with the Treasury to see if there was a way to help investors whose money is locked up due to bankruptcy proceedings against the 1031 exchange company. One such company is the defunct LandAmerica 1031. One possible mode of relief for investors was to exempt them from having to declare capital gains on the sale of their properties which was not fully completed by LandAmerica 1031 Exchange Services Inc. before going bankrupt. Another culprit company was Edward Hugh Okun's 1031 Tax Group LLP and several of its subsidiaries. Okun was recently handed a 100 year sentence in March for 23 counts of fraud in which he stole $126 million of exchange clients' money.

The core of the problem appears to be a timing issue. This is because the investors would have to declare the sale of their properties in their 2008 or 2009 tax returns while the bankruptcy proceedings take place, in which case they cannot take a loss until the bankruptcy case of the 1031 exchange company is settled. All parties concerned are hopeful the IRS will do something to address the timing issue.

Another possible means of solving the issue is through legislation as there is a distinct lack of governmental supervision and regulation over these exchange companies that hold people's money. The US Attorney's office has drafted a proposal for legislature that seeks to redress the problem but has refused to elaborate on what type of proposal was drafted.

Some states like Maine, Nevada and California have already legislation in place to regulate or place restrictions on these 1031 companies. But in some states like Virginia, legislation of this kind is conspicuously lacking.Darrin T. Mish is a veteran, nationally recognized tax attorney who has focused on providing IRS help to taxpayers for almost two decades. He regularly travels the country training other attorneys, CPAs and enrolled agents on how to handle their toughest cases with the IRS. He is highly ranked among the top attorneys in the country, with an AV rating from Martindale-Hubbell and a perfect 10 on Avvo.com. Martindale-Hubbell has also honored him with a listing in their Bar Register of Preeminent Lawyers. He is a member of the American Society of IRS Problem Solvers and the Tax Freedom Institute. With clients on every continent but Antarctica, he has what it takes to solve your IRS problems no matter where you live in the world. If you would like more information about his practice and how he can help you, please call his office at (813) 229-7100 or toll free at 1-888-GET-MISH.

Full post as published by IRS Problem Solver Blog on September 05, 2009 (boomark / email).