A — February 28 - March 13, 2014 — Mid Atlantic Real Estate Journal
www.marejournal.com M id A tlantic R eal E state J ournal By Scott Saunders&PamelaMichaels,Asset Preservation Due diligence when recommending a QI
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031 exchanges are on the rise in the Northeast and Mid Atlantic for many
poor selection can result in the exchange being disqualified on audit or worse, the loss of funds. Although a
Accordingly, it is important for both the taxpayer and the taxpayer’s tax/legal advisors to perform due diligence before choosing a QI company. The importance of this can be seen in Winters v. Dowdall (Winters v. Dowdall 63 A.D. 3d 650 (2009) 882 N.Y.S. 2d 100). In that case, the taxpayer sold a relinquished property in New York and retained Pat- rick Dowdall, of the law firm Dowdall and Associates, P.C. (“Dowdall” ), purported experts in the field, to provide guidance with their 1031 ex- change, and specifically with the selection of a QI. Dowdall selectedAtlantic Ex- change Company, LLC (“AEC”) to act as QI. During the course of the exchange, the taxpayer’s proceeds were stolen by AEC and Edward Okun, AEC’s sole member. The taxpayer’s loss was over $604,000. The tax- payer argued that his loss was caused by Dowdall’s legal mal- practice, including: · Failure to properly investi- gateAEC before selecting them as QI; · Failure to confirm that AEC was sufficiently bonded before recommending AEC as the QI; and · Failure to confirm that the taxpayer’s exchange proceeds were deposited into an account on behalf of the taxpayer as required by the terms of the exchange agreement. The Court determined that Dowdall did not adhere to their duty to perform sufficient due diligence because they did not sufficiently investigate the QI prior to recommending the QI to the taxpayer. Dowdall had represented that they were experts on the subject of 1031 tax deferred exchanges, and the taxpayer had relied upon these representations in hiring Dowdall. The Court specifically determined that the advice giv- en by Dowdall was negligent, and was the proximate cause of the damage to the taxpayer. Tax, legal and financial advi- sors should realize the impor- tance of performing sufficient due diligence before recom- mending a qualified intermedi- ary to facilitate a 1031 exchange on behalf of their clients. This due diligence should consist of an examination of the practices of the QI regarding the han- dling of client funds, and the security measures offered by the QI in the event of loss. continued on page 24A
reasons. The s i gn i f i c an t increase in capital gain rates in 2013 is a contrib- uting factor as is the ap- p r e c i a t i o n investors are
small number of states have enacted regu- lations gov- erning IRC Section 1031 exchange QI c omp a n i e s
Scott Saunders
PamelaMichaels
seeing in these markets. But investors seeking to perform a 1031 exchange should exercise caution in selecting a Qualified Intermediary (QI) as all are not equal by any means and a
(see Asset Preservation’s web- site for more information on various state QI regulations), there are no Federal regula- tions regarding QI’s and the safeguarding of exchange funds.
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