The bankruptcy and multiple lawsuits related to Franconia-based Edmund & Wheeler Inc.’s alleged participation in a national Ponzi scheme raises a number of questions over the regulation of the real estate reinvestment tool known as a 1031 exchange.
A like-kind 1031 exchange, so named after Section 1031 of the Internal Revenue Code, allows individuals and entities that sell commercial property to delay paying capital gains tax by buying or investing in another similar property of equal or greater value.
The 1031 exchange isn’t a new tool — in fact, it has been around for exactly 100 years. But the future of these exchanges may be in doubt, since the Biden administration is looking to severely limit their use.
They are very common. Although data is hard to come by, one estimate in a study issued by the Real Estate Research Consortium indicates that like-kind exchanges are involved in 10% to 20% of commercial real estate transactions, resulting in nearly $10 billion in revenue loss to the government.
Fraud is rare, but it does occur regularly. And it usually involves a qualified intermediary — known as a QI — which the IRS requires but doesn’t really regulate.
Most investors — particularly those new to 1031 exchanges — think of QIs as a neutral party, holding their money in escrow. The law prevents them from holding it too long, since sellers have to meet strict deadlines to receive the tax break. They have 45 days from the closing of the sale to select a new…