Eight states have legislated 1031 exchange laws that require the Qualified Intermediary (QI) accommodating the tax deferred exchange to follow or face criminal or civil penalties. The laws serve to protect taxpayer exchange proceeds, establish QI safeguards and procedures to alert the taxpayer of QI changes in ownership. Sanctioned by the Treasury Department and enforced by the Internal Revenue Service, the 1031 exchange allows taxpayers both domestic and foreign to defer federal and state capital gains and recaptured depreciation taxes when property held for the productive use in a business or investment is exchanged solely, for property held for productive use in a business or investment.
A brief outline of four state 1031 exchange laws follows for Nevada, Oregon, Virginia and Washington. In a previous article, state 1031 exchange laws for California, Colorado, Idaho and Maine were reviewed.
Nevada 1031 Exchange Law
Nevada NRS 205.960 and NRS 645G effective July 1, 2007 requires QIs to meet the following:
- To be licensed in the State of Nevada
- 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.
- Exchange proceeds are to be deposited into a Qualified Escrow Account
- QI operating account cannot be commingled with exchange proceeds
- An attorney, CPA or Certified Exchange Specialist© accommodating exchanges for three years is required to be designated as the “exchange facilitator officer” to supervise all 1031 exchanges
- If provisions are violated, the punishment is a category D felony
Oregon 1031 Exchange Law
Oregon House Bill 3484 was established June 5, 2009, effective January 1, 2010, requiring QIs 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.
Virginia 1031 Exchange Law
Effective July 1, 2010, Code of Virginia, Title 55, Chapter 27.1 requires QIs to adhere to the following:
- Maintain an error and omissions policy equal to or greater than $250,000. No fidelity bond is required.
- Private QIs must notify clients of change of control within 10 business days along with posting a notice on the QI’s website
- All exchange proceeds must be held in segregated accounts in financial institutions, invested in demand, time, savings, passbook, money market, CD or similar accounts, or client-directed other investment.
- All disbursements require taxpayer’s signature.
Washington 1031 Exchange Law
Originally the Washington House Bill 1078 was effective July 26, 2009, and was amended effective June 7, 2012 with the following requirements for QIs:
- Maintain a minimum one million dollar or greater fidelity bond and a minimum $250,000 or greater error and omissions policy, providing evidence of coverage for clients.
- Failure to disclose proper fidelity bond or Qualified Trust/Escrow is evidence of intent to defraud is there is a loss, subject to class B felony.
- Or the QI must hold exchange proceeds in a Qualified Trust or Escrow Account with a financial institution chartered under Washington law or laws of US requiring client signature for disbursement.
- Follow the Prudent Investment Standard for holding the exchange proceeds, including written notification to clients of how funds are invested.
- 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 on QI’s website.
- QI must not transfer funds to an affiliated entity unless the entity is the QI’s EAT.
- An attorney, CPA or Certified Exchange Specialist© must directly supervise QI business.
- Disclosed on the QI’s website and engagement or contractual agreement:
- Washington State Law, RCW 19.310.040, requires an exchange facilitator to either maintain a fidelity bond in an amount of not less than one million dollars that protects clients against losses caused by criminal acts or the exchange facilitator, or hold all client funds in a qualified escrow account or qualified trust. RCW 19.310.040(1)(b)(as amended)
- If other products or services are recommended and the QI may receive a financial benefit, the fee or benefit must be disclosed.
In summary, the state laws provide the taxpayer with recourse should the QI violate the procedures to protect the exchange proceeds and state resident for property sold in their state.
We Can Help
Atlas 1031 Exchange has been accommodating tax-deferred exchanges of all kinds for more than 17 years. We are fluent in the rules and regulations of IRC Section 1031 and able to help you navigate your exchange.
Contact us today to discuss any questions you may have. Call our office at 1-800-227-1031, email us at info@atlas1031.com, or submit your question through the online form at the top of this page.
