Not Regulated?

“I was shocked to find they weren’t regulated,” a statement from Richard DeJana, Kalispell attorney who represents an area resident who incurred losses from Sumit 1031 Exchange.

The firm declared bankruptcy and filed for Chapter 11 bankruptcy in late December after announcing it has only about $13 million on hand of the $27 million it owes its clients. Rather than investing customers’ money in short-term, liquid securities, like most accommodators do, Summit’s principals had been putting millions of dollars into real estate deals, according to a posting on the company’s Web site.

Summit specialized in 1031 tax-deferred exchanges, a type of real estate investment named after a section of the IRS tax code. The exchanges allow investors to defer taxes on the sale of investment property so long as the proceeds from the deal are held by a third party, like Summit, and reinvested within 180 days in a similar property.

Now that many in the industry are declaring the same, regulation as to who can open a 1031 exchange company is being questioned. Most states do not regulate 1031 accomodators. In fact the exact number of qualified intermediaries is unknown and under the law, a company can act as a 1031, but so can a friend.

After an exchange company in New York left more than 500 customers out $132 million in 2007, the Federation of Exchange Accommodators petitioned the Federal Trade Commission to apply registration and certification standards to the industry. The petition cited 23 cases involving $250 million losses.

Victims of abuse, including some here, have often voiced frustration with a system that required them to hand their money over to a third party but offers little protection against fraud.