1031 exchange laws have been passed in eight states requiring Qualified Intermediaries to follow specific procedures to protect the exchange proceeds of their residents engaged in a 1031 tax deferred exchange. A 1031 exchange is a Section of the Treasury and IRS Regulations that provides taxpayers a tax deferral on the federal capital gains and recaptured depreciation tax when real or personal property held for investment or in a business is sold and replaced with like-kind property. A Qualified Intermediary (QI) is the third party who accommodates the exchange, providing documentation in accordance with the Treasury and IRS requirements and holding the exchange proceeds. States also recognize the federal statute allowing the taxpayer to defer state capital gains taxes if applicable.
California, Colorado, Idaho, Maine, Nevada, Oregon, Virginia and Washington have legislated specific procedures for the QI to follow or be subject to civil or criminal penalties. What follows is a brief overview of those states and their requirements. Links are provided to the individual bills or legislation reviews.
California 1031 Exchange Law
Effective January 1, 2009, the California Senate Bill No. 1007, Chapter 708, was established and applied when the relinquished property or property parked with an Exchange Accommodator Titleholder (EAT) is located in California. Anyone who accommodates an exchange for a fee, maintains an office in California for the purpose of 1031 exchanges or advertises as an accommodator is required to:
- Maintain a fidelity bond equal to or greater than one million dollars and an error and omissions policy equal to or greater than $250,000. A qualified escrow account can be used in place of the fidelity bond.
- Follow the Prudent Investment Standard for holding the exchange proceeds.
- Maintain a QI operating account that cannot be commingled with exchange proceeds.
- Notify current clients within 10 business days if more than 50 percent of the QI’s assets or ownership is conveyed to another party.
- Not transfer funds to an affiliated entity unless the entity is the QI’s EAT.
Colorado 1031 Exchange Law
House Bill 09-1254 was signed into law on April 16, 2009, for Colorado residents engaging exchange facilitators. QIs accommodating real property exchanges are required to:
- Maintain a fidelity bond equal to or greater than one million dollars and an error and omissions policy equal to or greater than $250,000. A qualified escrow account can be used in place of the fidelity bond.
- Follow the Prudent Investment Standard for holding the exchange proceeds.
- Maintain a QI operating account that cannot be commingled with exchange proceeds.
- Notify current clients within 2 business days if more than 50 percent of the QI’s assets or ownership is conveyed to another party within 12 months.
- Not transfer funds to an affiliated entity unless the entity is the QI’s EAT.
- Seek taxpayer’s written authorization if disbursement is equal to or greater than $250,000.
Idaho 1031 Exchange Law
The Idaho Escrow Act was established, requiring QIs to follow procedures set forth in the Policy Statement effective July, 2007, including:
- To be licensed in Idaho. QIs accommodating exchanges in Idaho without a license are subject to a felony.
- Maintain a minimum $1,000,000 fidelity bond and minimum $250,000 error and omissions policy.
Maine 1031 Exchange Law
Maine Public Law, Chapter 212-C Regulation of Exchange Facilitators was signed into effect on September 12, 2009, requiring QIs to be licensed along with the following requirements:
- Maintain a fidelity bond equal to or greater than one million dollars and an error and omissions policy equal to or greater than $250,000. A qualified escrow account can be used in place of the fidelity bond.
- Follow the Prudent Investment Standard for holding the exchange proceeds.
- QI operating account cannot be commingled with exchange proceeds.
- Current clients must be notified within 10 business days, if more than 50 percent of the QI’s assets or ownership is conveyed to another party and post notice on website.
- QI must not transfer funds to an affiliated entity unless the entity is the QI’s EAT.
Nevada, Oregon, Virginia and Washinton state laws will be discussed in a subsequent article. To learn what questions to ask when vetting a Qualified Intermediary, consider four questions, that very few taxpayers ask.
