1031 Exchange Accomodators, Others Accused in $80 Million Theft

A class action lawsuit has been filed in California against Donald Kay McGhan, 1031 exchange accommodators Southwest Exchange, of Nevada and Qualified Exchange Services, of Santa Barbara, and others containing allegations of theft of over $80 million from 130 people in 12 states, according to a report by the San Luis Obispo Tribune.

This civil lawsuit, filed by the Santa Barbara law firm of Hollister & Brace, claims the money was stolen in a scheme involving "1031" or "tax-free" exchanges of real estate. "1031" is a reference to a provision in the Federal tax law (Section 1031 of the Internal Revenue Code) that essentially says that, if you structure your transaction correctly, you can sell your investment real estate, take the proceeds and reinvest it in, what the tax law refers to as, property of a "like kind" without having to pay immediate capital gains taxes; the tax liability is deferred indefinitely. Part of structuring your transaction correctly involves the use of an independent third party intermediary to hold the sale proceeds from the sale of one property in trust until the reinvestment property is purchased.

The money that was allegedly stolen represents the proceeds of the alleged victims' sales of their investment real estate that was being held in trust by the intermediary and earmarked for reinvestment. Because the funds now aren't available for reinvestment, these investors have not only had their money stolen, but they are now ineligible for the indefinite deferral of their capital gains taxes allowed by the tax law. In other words, they will have to pay immediate capital gains taxes on the profits from their real estate sales and, hopefully for them, they have enough money from other sources to pay it.

Further, the lawsuit indicates that these investors had purchase contracts to buy property that the reinvestment proceeds were earmarked for. Because the money is now no longer available, the investors are liable for contractual damages to the sellers of the reinvestment property for defaulting on the purchase contracts.

Reportedly, the FBI is investigating the possibility of criminality. To read more, see Santa Barbara suit alleges ponzi scheme by breast implant pioneer. sneaky slick escrow agents gamma