The Innkeeper's Resource

1031 Exchange Warning and Advice

1031 Tax Deferred Exchanges are wonderful when they work, but we've just learned of a financial disaster and believe everyone needs to take note.

Simply put, a 1031 Tax Deferred Exchange is a mechanism whereby a real estate investor can roll over the cost basis from one investment property to another and defer paying capital gains taxes until the last property is sold and cashed out. In a transaction, a third party "qualified intermediary" ("QI") holds the funds from a sale until a new purchase is made following strict IRS guidelines. The QI then pays out the funds for the purchase and receives a fee for their services. The problem is, the industry of exchanging is not regulated, and here's what happened to clients of The B&B Team.

They sold their inn. Proceeds of sale went to a qualified intermediary per the rules. They had 45 days to designate new investments and 180 days to settle. After 45 days they hadn't found a property to buy, so they asked for their funds back, only to discover that there was no money! "It seems that he [the QI] invested client funds in Lehman Brothers auction rate securities probably as long as a year ago. When that market froze, he started funding exchanges with new client money (otherwise known as a Ponzi scheme). By the time we were to be funded, there wasn't any cash left."

This is an unmitigated disaster for these folks, and apparently there are a number of exchange companies recently that have filed for bankruptcy, so others have been hurt by similar schemes and problems. But don't throw out the baby with the bath water. There is a solution to protect yourself.

Our client goes on to say, "If someone wants to do a 1031, they need to make sure that the agreement states that their funds are to be kept segregated in an account in their name (very important) and that they specify how the funds are to be invested. In addition, they need to make sure they get copies of the bank statements. If the amount is more than FDIC covers, they might want a surety bond for the difference." To support this, our client adds that "The only one getting their money back so far is someone who did the above. The court ordered an immediate release of their funds."

In a time of greed and uncertainty, there seems to be no shortage of unscrupulous people. But bad behavior doesn't make a system wrong. It's people who are flawed, and people who can learn lessons. We hope you'll make note of this warning and advice about 1031 exchanges, so you can both take advantage of the great tax benefits inherent in them and protect your assets in the process.

Peter

The New Year

While we're only into the New Year for a matter of hours/days, it already feels good. Not because things have magically become better or easier, but because a New Year brings a new beginning and a fresh start.

Because of the current news and the pundits telling us about the economy, I added a posting to our blog on the 31st about Corporate Darwinism and how it is projected in 2009, that it will be the strong who will  survive. I hope you'll take a moment and read it. This morning, I read another view of this timely topic by Scott Testa, a marketing professor at St. Josephs University in Philadelphia.

As he and his views are more marketing/brand driven, I found his comments so very appropriate to our industry.  He talks about many of the things that The B&B Team talks about (and does so with regularity), your Brand (your Inn), your Brand's Promise and the Experience your Brand provides.

Professor Testa states, "The really smart companies, when things are bad, take the opportunity to really grow their brand."

Rita Rodriquez, a CEO for a large branding company adds, "Companies will have to find ways to stand out and that includes making sure customers picky about where they spend their money have a better experience....The brand is going to have a bigger opportunity to stand out and to articulate a promise and to deliver the experience...and it's going to have to do that in 2009."

Couldn't have said it better!  Since I can't, I can only restate what we've said all along: Good Inns are  the ones who stay focused on: their Brand, their Strengths, Creative Marketing Initiatives, understanding their Guest, being Authentic and creating a Sustained Emotional Bond with their Guests, responding to the times…the i.guest…social media…web 2.0, knowing that it's about Value…not just price, but Value, and finally, being the Very Best!

Happy New Year.

Rick