Dabbling in 1031s Costs Title Company Small Fortune

It is always interesting to learn from other people’s mistakes. In the following circumstances both the company and the client gained valuable insight on what to do differently next time. Whenever a court case makes the headlines, we know we should sit up and pay attention, especially when over $100,000 is at stake.

Our story starts when a title company decided to help its client out by not only acting as the title insurer and the escrow closer, but also the Qualified Intermediary to facilitate their client’s 1031 Exchange transaction. The same staff was responsible for all duties involved – a one stop shop if you will. Sounds good so far, right?

The client/Exchanger told the title company that they intended to Exchange a $765,000 relinquished property for replacement property consisting of vacant land valued at $356,160 which would then have a warehouse built on it – something that is commonly referred to as an Improvement or Build to Suit Exchange. With this type of transaction the taxpayer cannot take title to the replacement property until the improvements are complete (or as close to completion as possible within the 180 day time frame allowed). The property would normally get “parked” under a separate entity through the Qualified Intermediary during this time. Instead of executing paperwork for ”parking” the property, the title company went ahead and drafted up paperwork for a standard Delayed Exchange – mistake #1!

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