Wow. This is complicated, but worth reading and worth talking about. Should the SC legislature be encouraged to act in protection of SC investors?
"Where to start with this story? It has so many moving parts and players: more than $130 million in missing money for starters, and criminal investigations, civil lawsuits and hundreds of real estate deals hanging in the works. Then likely to follow from it all could come additional scrutiny on the burgeoning 1031 tax exchange industry.

The troubles came to light last week when The 1031 Tax Group LLC, a Richmond, VA-based privately held consolidated group of qualified intermediaries for deferred like-kind property exchanges, filed for chapter 11 reorganization in U.S. Bankruptcy Court for the Southern District of New York. Edward H. Okun is owner and sole "member" of The 1031 Tax Group. Also filing for chapter 11 were 16 other firms rolled up as subsidiaries of The 1031 Tax Group, each designated as qualified intermediaries created to service real property exchanges. The intermediaries are spread out across the country including in San Jose, Boston, Denver, San Antonio, Tampa and New York."

So what exactly is a 1031?
"In a typical 1031 exchange, an exchanger sells its business or investment real estate and then has 45 days from the date of sale of the property to identify a like kind replacement property and it has 180 days from the date of the sale to close on the purchase of that replacement property without suffering any tax consequence. In order to preserve the tax deferral, the exchanger cannot take title to the proceeds of the first sale, but must instead deposit the proceeds with a 'qualified intermediary,' until such time that the exchanger is ready to close on the replacement property.

In The 1031 Tax Group's case there were more than 300 open exchange contracts representing an estimated liability of $151 million outstanding at the time of the bankruptcy filing. Deals ranged in size from tens of thousands of dollars to $10.5 million. That means there are more than 300 individuals or business entities now bumping up against a 180-day Internal Revenue Service-imposed window to conclude the second half of their real estate exchange, or face tax burdens and penalties.

According to court papers, lawyers have begun petitioning the IRS seeking relief and to avoid paying taxes on money that has disappeared. And according to The 1031 Tax Group's filings, it does not have that money to meet those property closing obligations. Where the money is, remains a mystery."

What should this case mean to you and me?
"Critics say the size and extent of the Okun case highlights the need for greater oversight to protect investors from what they see as a major flaw in the like-kind exchange system - a lack of federal oversight on this legal way to shield capital gains from the IRS, according to a report by the Florida Association of Realtors. Pat McCaffrey, a representative of another national 1031 exchange company, Investment Property Exchange Services Inc., told the Florida Association of Realtors that the bankruptcy is 'a black eye for the industry.'

'It's a non-regulated industry,' McCaffrey was quoted as saying. 'Anybody can hang up a shingle in their garage, and people will give them millions of dollars.' McCaffrey says he would 'welcome regulation,' but in the meantime recommends that investors don't just ask a company if it's bonded, but also 'read the bond and see what the bond will pay for.'

Currently, only one state, Nevada, regulates 1031 exchange intermediaries - but only minimally. '(1031 exchanges) are a niche industry,' Chris Lee, deputy secretary of state of Nevada told the Florida Realtors group. 'They've flown under the radar for a very, very long time. For the amount of money they handle, it's amazing that no one is regulating them.'

For the full story from the CoStar Group (the #1 Commercial Real Estate Information Company in the U.S.): http://www.costar.com/News/Article.aspx?id=EFD6CD08C5E48546B413B6131980B7BA&ref=100